Chapter 7:

Cash and receivables

Erica Pimentel PhD, CPA
COMM 311
October 2 & 4, 2024
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Define Financial Asset

“Any asset that is:

i. Cash;
ii. A contractual right to receive cash or another financial
asset from another party;
iii. A contractual right to exchange financial instruments
with another party under conditions that are potentially
favourable; or
iv. An equity instrument of another entity.”
CPA Canada Handbook, Part II, Section 3856
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What is Included in Cash?

• Classified as a current asset

• Consists of coins, currency, available funds on deposit
at a bank, and petty cash
• Also includes money orders, certified cheques, cashier’s
cheques, personal cheques, bank drafts, usually savings
accounts, and money-market funds with chequing
privileges
Post-dated cheques and travel advances are not
classified as cash.
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Restricted Cash

Some categories of cash need special attention with respect to

reporting:

Restricted cash—
• Petty cash, special payroll, dividend bank accounts
• If the restricted cash balance is material, it must be
segregated
• Classified as current or non-current assets depending on date
of availability or expected disbursement
• Compensating balances
• Legally restricted balances
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Foreign Currencies

• Amount is reported in Canadian dollars on the

date of the SFP
• The exchange rate on the date of the SFP
• If restrictions exist on foreign funds, those funds
are reported as restricted
• Either current or non-current
Some Canadian companies identify US funds as their
functional currency.
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Bank Overdrafts

• Occur when cheques are written in excess of the cash

account balance
• Reported as current liabilities (sometimes included
with accounts payable)
• Should not be offset against the Cash account
• May be offset against available cash in another
account at the same bank
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Cash Equivalents

“short-term, highly liquid investments that are

readily convertible to known amounts of cash and
which are subject to an insignificant risk of changes
in value.”
CPA Canada Handbook Part II, Section 1540.06(b) and IAS 7.6
• Original maturity of three months or less-–such as treasury bills,
money-market funds, commercial paper
• ASPE exclude equity securities
• Under IFRS, some equity instruments can be classified as cash
equivalents (for example, preferred shares close to maturity)
• Cash equivalents are reported at fair value
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In-class example
• Miracle Movers Inc. report the following amounts on their
trial balance as at December 31, 2023:
Coins
$120
US dollars
$150
(shown in USD, exchange rate $1.31 CAD/USD)
Savings at First National Bank
$1,400
Post-dated cheques
$75
(dated January 5, 2024)
• Question: What balance should Miracle Movers report as its
Bank overdraft
cash balance at December 31, 2023?
($2,257)
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Discussion question

Would a digital
Canadian dollar be
reported as cash?

https://www.bankofcanada.ca/
digitaldollar/
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Definition and Types of Receivables

… claims that a company has against customers and others,

usually for the unconditional right to specific cash receipts in the
future.
• Current (short-term) or non-current (long-term)
• Trade receivables are amounts that result from
operating transactions
• Accounts receivable (verbal promise to pay,
normally within 30 to 60 days)
• Notes receivable (written promises with specified
terms)
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Types of Receivables

• Loans receivable; notes receivable: usually long-

term
• Nontrade receivables: written promises to pay cash
or deliver other assets, include:
1. Advances to employees or officers
2. Delayed payment terms from a purchaser
3. Receivables from the government (GST/HST recoverable,
income tax receivable)
4. Dividends and interest receivable
5. Claims against insurance companies
Government debt, corporate bonds, convertible debt,
and commercial paper are not receivables.
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Accounts Receivable-Recognition

Recognize an accounts receivable when the entity becomes

a party to the contractual provisions of the financial
instrument.
• When one of the parties to the contract has performed under
the agreement
• Timing of A/R tied to revenue recognition (Chapter 6)
• When a sale is recognized, cash is received or an accounts
receivable is recognized
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Impairment of Accounts Receivable under
ASPE

Impaired …”significant adverse change” in expected timing

of future cash flows or the amount expected to be repaid.
CPA Canada Handbook, Section 3856.16

• All receivables assessed for indications of

uncollectibility or impairment
• Impaired receivables are recorded via an Allowance for
Doubtful Accounts (or allowance for impairment)
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Bad Debt Expense

Problem! The company doesn’t know which customers will not pay!
Solution: “Allowance Method”
On the Income Statement: Recognize estimated bad debt expense related to credit sales
made in the current period
• Why do we need to do this? The Matching Principle!
Today Sometime in the Future

$100,000 credit sales in the current $9,000 is uncollectible

period
$9,000 estimated expense
recognized
On the Balance Sheet: Reduce the book value of Accounts Receivable using a contra-asset –
Allowance for Doubtful Accounts
Adjusting Bad Debt Expense (+E, -SE) 9,000
Entry Allowance for Doubtful Accounts (+xA, -A)
9,000
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Allowance for Doubtful Accounts

Receivables are presented on the B/S “net” of Allowance for
Doubtful Accounts

Accounts Receivable (gross) (A) Allowance for Doubtful Accounts (xA)

Beginning XXXX Beginning XXXX
Credit Sales XXXX Cash Collections XXXX Bad Debt Expense XXXX
Write-Offs XXXX Write-Offs XXXX
Ending XXXX Ending XXXX

Accounts Receivable (net) (A)

Beginning XXXX
Credit Sales XXXX Cash Collections XXXX Not an Actual
Bad Debt Expense XXXX Account, but a
Amount of Ending XXXX Net Amount on
Receivables we
the Balance
expect to collect
Sheet!
Estimating Uncollectible Accounts: 16

Percentage of Credit Sales Method

Under Percentage of Credit Sales Method:
Bad Current
% Estimated to
Debt Period
be
Expens Credit
Uncollectible
e Sales
Example: Assume credit sales in 2020 of $100,000, where
management expects 1% to be uncollectible.
The 2020 Journal Entry for Bad Debt Expense is:
Dr. Bad Debt Expense (+E, -SE)
1,000
Cr. Allowance for Doubtful Accounts (+xA, -A)
1,000
This method is simple to apply, but generally less accurate than
the Aging of Receivables Method.
Estimating Uncollectible Accounts:
17

Aging of Receivables Method

Age of Receivables Ending A/R Estimated % Estimated $
Balance Uncollectible Uncollectible
(thousands) (thousands)
> 90 days past due $28 25 $7.00
61 to 90 days past due 87 10 8.70
31 to 60 days past due 187 5 9.35
Less than 31 days past 633 0.5 3.17
due
Current Receivables 2,932 0.061 1.78
Total $3,867 $30

If the current balance of Allowance for Doubtful Accounts is

$10,000, what journal entry will be recorded for Bad Debt
Expense?
Dr. Bad Debt Expense (+E, -SE)
20,000
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In-class exercise: Estimating uncollectible
accounts
Assume the following for Megatech Company:
• The ending balance of Accounts Receivable was $200,000, broken out as
follows:
Age of Receivables Ending A/R Estimated %
Balance Uncollectible
(in $)
>45 days past due 23,000 7
Less than 45 days past 37,000 1
due
Current Receivables 140,000 0.25
Total 200,000

• The current balance of Allowance for Doubtful Accounts is $2,000

• Credit sales during the year were $220,000

Provide the journal entry to record bad debt expense for the year using:
(1) the percentage of credit sales method, assuming a rate of 0.2%, and
(2) the aging of receivables method using the information provided
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Naming Conventions for Accounts Receivable
Related Accounts

a) IFRS - most companies now use “Allowance for Expected

Credit Losses” on the SFP and “Loss on Impairment” (or
something similar) as account names
b) ASPE - many companies still use “Allowance for Doubtful
Accounts” on the B/S and “Bad Debt Expense” as account
names
Write-offs 20

We made an estimate before knowing which accounts would be

uncollectible Today Sometime in the Future

$100,000 credit sales in the current $9,000 is uncollectible

period
$9,000 estimated expense
recognized

In the future, we’ll find out which customers aren’t going to pay.
Last Period Today

$100,000 credit sales We learn that a customer who owes $5,000

won’t pay
$9,000 estimated expense (If our estimate was good, ~$4,000 more will end up being
recognized uncollectible)

When it’s clear that a specific receivable will not be collected, we

“write off” the Accounts Receivable and Allowance for Doubtful
Accounts
Example: We learn that a customer who owes us $5,000 is not going
to pay.
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What is the Effect of a Write-off?

Example: We learn that a customer who owes us $5,000 is not going to pay.
Dr. Allowance for Doubtful Accounts (-xA, +A) $5,000
Cr. Accounts Receivable (-A) $5,000
How do write-offs affect Net Income?
• They don’t! We already recorded the expense associated with this bad debt last
period! Note: The $9,000 here
was the company’s
Dr. Bad Debt Expense (+E, -SE) $9,000
estimate of all of bad
Cr. Allowance for Doubtful Accounts (+xA, -A) $9,000 debts, since they
didn’t know which
How do write-offs affect net receivables? accounts would be
• uncollectible at the
Accounts Receivable (A) and Allowance for DA (xA) decrease
Before After time
• Since the asset
Example: and the contra-asset
$5,000 are both reduced, net receivables do not change
$5,000
Write-off Write-off
Accounts Receivable (A) $100,000 $95,000
Allowance for Doubtful (20,000) (15,000)
Accounts (xA)
Accounts Receivable, Net $80,000 $80,000
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Recovery of an Uncollectible Account

An account previously written off may be collected in the future (this is rare) – this is
called a bad debt recovery

We record this with two separate entries:

(1) Reverse the write-off entry to reinstate the account
Dr. Accounts Receivable $5,000
Cr. Allowance for Doubtful Accounts $5,000

(2) Record the cash collection

Dr. Cash $5,000
Cr. Accounts Receivable
$5,000

We need to put the $5,000 back into Allowance for Doubtful Accounts because even
though this customer paid, we still expect this amount to be uncollectible (i.e., other
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In-class accounts receivable

exercise
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Notes and Loans Receivable

• Notes receivable differ from accounts receivable as

they are supported by a promissory note (with
specific terms)
• All notes contain some interest element and
maturity date—short term notes mature within one
year
• Notes are either
• Interest bearing: Have a stated rate of interest or
• Zero-interest bearing (or non-interest bearing):
Interest amount is the difference between the
amount borrowed and the face amount paid back
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Interest Bearing Short-Term Notes Receivable

Example: On February 1, 2023, an accounts receivable of $25,000 is
exchanged for a 5%, six-month note. What journal entries would the
company make to record the substitution and payment of the note?

Date Description Debit Credit

Feb 1 Notes Receivable 25,000
Accounts Receivable 25,000
Aug 1 Cash 25,625
Notes Receivable 25,000
Interest Income 625
($1,000 × 6% × 6 over
$25,000 x 5% x (6/12) = $625
12)
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Non-Interest Bearing Short-Term Notes
Receivable

Example: On February 1, 2023, a $25,000, one-year non-

interest bearing note is issued for $23,810; 5% is the
implied interest rate.
Date Description Debit Credit
23-Feb Notes Receivable 23,810
Cash 23,810
23- Cash 25,00
Nov
Notes Receivable 23,810
Interest Income 1,190
$23,810 x 5% = 1,190
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Long-term Notes and Loans Receivable

• Long-term notes and loans receivable are recognized at fair
value – that is, the present value of the future cash flows
discounted at market rate
• Face rate: stated interest rate
• Effective interest rate: PV discount rate
• If stated rate = market rate, fair value = face value
• If stated rate < or > market rate, loan issued at a premium or
discount, amortized
• IFRS requires effective interest method of amortization;
ASPE does not specify
• Transaction costs: added to the fair value (preferred by IFRS and
ASPE) or expensed
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Notes receivable – Effective interest rate
method
Market interest rate Notes issued at:

4% Discount

Interest rate: 5% 5% Face value

6% Premium

• Carrying amount of a note receivable = face value less any unamortized

discount, or plus any unamortized premium—in other words, the balance in the
Notes Receivable account.
• At the date of issue, the carrying amount equals the fair value of the note
receivable
• Over time, the carrying amount will equal the note receivable’s face value.

• Interest income =/= interest received (due to discount or premium

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Time value of money formula – lump sum

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Ordinary annuity formulae

Where:

n = number of payments in the annuity stream

I = market interest rate
Payment = coupon payment
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In-class notes receivable

exercise