7 Cash and Receivables Financial Reporting 7
Financial Reporting
The Procter & Gamble Company (P&G)
The financial statements of P&G are presented in Appendix B. The company’s complete annual report, including the notes to the financial statements, is available online.
Instructions
Refer to P&G’s financial statements and the accompanying notes to answer the following questions.
(a) What criteria does P&G use to classify “Cash and cash equivalents” as reported in its balance sheet?
(b) As of June 30, 2014, what balances did P&G have in cash and cash equivalents? What were the major uses of cash during the year?
(c) P&G reports no allowance for doubtful accounts, suggesting that bad debt expense is not material for this company. Is it reasonable that a company like P&G would not have material bad debt expense? Explain.
Comparative Analysis Case
The Coca-Cola Company and PepsiCo, Inc.
The financial statements of Coca-Cola and PepsiCo are presented in Appendices C and D, respectively. The companies’ complete annual reports, including the notes to the financial statements, are available online.
Instructions
Use the companies’ financial information to answer the following questions.
(a) What were the cash and cash equivalents reported by Coca-Cola and PepsiCo at the end of 2014? What does each company classify as cash equivalents?
(b) What were the accounts receivable (net) for Coca-Cola and PepsiCo at the end of 2014? Which company reports the greater allowance for doubtful accounts (amount and percentage of gross receivable) at the end of 2014?
(c) Assuming that all “net operating revenues” (Coca-Cola) and all “net revenues” (PepsiCo) were net credit sales, compute the accounts receivable turnover for 2014 for Coca-Cola and PepsiCo; also compute the days outstanding for receivables.
What is your evaluation of the difference?
Financial Statement Analysis Cases
Case 1: Occidental Petroleum Corporation
Occidental Petroleum Corporation reported the following information in a recent annual report…
Instructions
(a) What items other than coin and currency may be included in “cash”?
(b) What items may be included in “cash equivalents”?
(c) What are compensating balance arrangements, and how should they be reported in financial statements?
(d) What are the possible differences between cash equivalents and short-term (temporary) investments?
(e) Assuming that the sale agreement meets the criteria for sale accounting, cash proceeds were $345 million, the carrying value of the receivables sold was $360 million, and the fair value of the recourse liability was $15 million, what was the effect on income from the sale of receivables?
(f) Briefly discuss the impact of the transaction in (e) on Occidental’s liquidity.
Case 2: Microsoft Corporation
Microsoft is the leading developer of software in the world. To continue to be successful Microsoft must generate new products, which requires significant amounts of cash. The following is the current asset and current liability information from Microsoft’s current balance sheets (in millions). Following the Microsoft data is the current asset and current liability information from Oracle’s current balance sheets (in millions). Oracle is another major software developer…
Part 1 (Cash and Cash Equivalents)
Instructions
(a) What is the definition of a cash equivalent? Give some examples of cash equivalents. How do cash equivalents differ from other types of short-term investments?
(b) Calculate (1) the current ratio and (2) working capital for each company for 2014 and discuss your results.
(c) Is it possible to have too many liquid assets?
Part 2 (Accounts Receivable)
Microsoft provided the following disclosure related to its accounts receivable…
Instructions
(a) Compute Microsoft’s accounts receivable turnover for 2014 and discuss your results. Microsoft had sales revenue of $69,943 million in 2014.
(b) Reconstruct the summary journal entries for 2014 based on the information in the disclosure.
(c) Briefly discuss how the accounting for bad debts affects the analysis in Part 2 (a).
Accounting, Analysis, and Principles
The Flatiron Pub provides catering services to local businesses. The following information was available for The Flatiron Pub for the years ended December 31, 2016 and 2017.
December December
31, 2016 31, 2017
…
Flatiron management is preparing for a meeting with its bank concerning renewal of a loan and has collected the following information related to the above balances.
1. The cash reported at December 31, 2017, reflects the following items: petty cash $1,575 and postage stamps $110. The other current assets balance at December 31, 2017, includes the checking account balance of $4,000.
2. On November 30, 2017, Flatiron agreed to accept a 6-month, $5,000 note bearing 12% interest, payable at maturity, from a major client in settlement of a $5,000 bill. The above balances do not reflect this transaction.
3. Flatiron factored some accounts receivable at the end of 2017. It transferred accounts totaling $10,000 to Final Factor, Inc. with recourse. Final Factor will receive the collections from Flatiron’s customers and will retain 2% of the balances. Final
Factor assesses Flatiron a finance charge of 3% on this transfer. The fair value of the recourse liability is $400. However, management has determined that the amount due from the factor and the fair value of the resource obligation have not been recorded, and neither are included in the balances above.
4. Flatiron charged off uncollectible accounts with balances of $1,600. On the basis of the latest available information, the 2017 provision for bad debts is estimated to be 2.5% of accounts receivable.
Accounting
(a) Based on the above transactions, determine the balance for (1) Accounts Receivable and (2) Allowance for Doubtful
Accounts at December 31, 2017.
(b) Prepare the current assets section of The Flatiron Pub’s balance sheet at December 31, 2017.
Analysis
(a) Compute Flatiron’s current ratio and accounts receivable turnover for December 31, 2017. Use these measures to analyze
Flatiron’s liquidity. The accounts receivable turnover in 2016 was 4.37.
(b) Discuss how the analysis you did above of Flatiron’s liquidity would be affected if Flatiron had transferred the receivables in a secured borrowing transaction.
Principles
What is the conceptual basis for recording bad debt expense based on the percentage-of-receivables approach at December 31, 2017?
