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Acct 351 > Acct 351 Chapter 07 > Flashcards

Acct 351 Chapter 07 Flashcards

1
Q

aging method

A

A method of estimating the percentage of outstanding receivables that will become uncollectible based on past experience, without identifying specific accounts

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2
Q

aging schedule

A

A schedule to organize accounts receivable that indicates which accounts require special attention by providing the age of such accounts receivable

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3
Q

allowance method

A

A method of estimating uncollectible accounts receivable whereby bad debt expense is recorded in the same period as the sale to obtain a proper matching of expense and revenues and to achieve a proper carrying value for accounts receivable. (Synonym: indirect method)

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4
Q

Amortized cost

A

The acquisition cost adjusted for the amortization of the discount or premium

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5
Q

asset-backed financing

A

The use of receivables as collateral to generate immediate cash for a company, either through secured borrowings or sales of receivables

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6
Q

asset-backed securities

A

Securities that represent ownership claims to a pool of individual loans that have been securitized: i.e., repackaged into asset pools in which ownership interest have been sold

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7
Q

bad debts

A

The impairment of trade receivables (also known as uncollectible accounts).

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8
Q

Bank overdrafts

A

When cheques are written for more than the amount in the cash account

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9
Q

bank reconciliation

A

A schedule explaining any differences between the bank’s and the company’s records of cash

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10
Q

Basic loan features

A

Contractual terms that result in cash flows that are payments of principal and interest

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11
Q

beneficial interest

A

A debt or equity claim to the cash flows of the party that acquired the receivables, arising when a company sells a receivable

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12
Q

Cash

A

Cash on hand and demand deposits

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13
Q

Cash discounts

A

Sales discounts that are offered to induce prompt payment

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14
Q

Cash equivalents

A

Short-term, highly liquid investments that are readily converted to known amounts of cash and are subject to an insignificant risk of change in value

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15
Q

compensating balances

A

That portion of any demand deposit (or any time deposit or certificate of deposit) maintained by a corporation, which constitutes support for existing borrowing arrangements of the entity with a lending institution

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16
Q

contra account

A

An account on the balance sheet that reduces either an asset, a liability, or an owners’ equity account

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17
Q

contractual yield basis

A

A model of managing a long-term receivables contract involving the holding of instruments for their principal and interest flows

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18
Q

coupon rate

A

The interest rate written in terms of the bond indenture (Synonyms: stated interest rate, face or nominal rate).

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19
Q

credit risk

A

The risk that one of the parties to the contract will fail to fulfill its obligation under the contract and cause the other party loss

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20
Q

Deposits in Transit

A

Deposits that have yet to be recognized in a firm’s bank account

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21
Q

derecognized

A

Describing an asset after all of its related items have been removed from a company’s accounts

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22
Q

direct writeoff method

A

A method for recording uncollectible accounts receivable where no entry is made until a specific account has definitely been established as uncollectible

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23
Q

discount

A

When a bond sells at less than face value

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24
Q

effective interest method

A

The current market rate of interest at the time of investment

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25
Q

effective interest rate

A

Total income tax expense divided by pretax income reported on the financial statements

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26
Q

face value

A

The fair value of an interest-bearing note or loan receivable when the stated interest rate is equal to the effective (market) rate

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27
Q

Factoring receivables

A

When a company sells its accounts receivable to banks or finance companies that buy receivables from businesses for a fee and then collects the remittances directly from the customers

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28
Q

fair value

A

An estimate of the price an enterprise would have received if it had sold the asset or would have paid, if it had been relieved of the liability, on the measurement date in an arm’s length exchange motivated by normal business considerations

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29
Q

financial asset

A

A receivable that represents contractual rights to receive cash or other financial assets from another party

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30
Q

implicit interest rate

A

This is the discount rate that corresponds to the lessor’s internal rate of return on the lease.

31
Q

imprest system

A

A petty cash system where the custodian is responsible for the amount of funds on hand at all times, whether the amount is in cash or signed receipts

32
Q

imputed interest rate

A

The actual interest rate realized on bond, which is different from the stated rate when there is a discount or premium

33
Q

intact

A

Describing receipts being transferred to a bank that are complete, accounted for together, and where no part of the amount is used for other purposes

34
Q

Interest-only strip receivable

A

The contractual right to receive some or all of the interest due on an interest-bearing receivable

35
Q

Interest-bearing notes

A

These have a stated rate of interest that is payable over and above the face value of the note

36
Q

Loans and receivables

A

These financial assets result from the delivery of cash or other assets by a lender to a borrower in return for a promise to pay an amount on a specified date(s) or on demand, usually with interest.

37
Q

loans receivable

A

An agreement when one party advances cash or other assets in exchange for a promise to be repaid later

38
Q

net realizable value

A

The net amount expected to be received in cash for an asset

39
Q

non-interest-bearing notes

A

Notes that include interest, equal to the difference between the amount borrowed (the proceeds) and the face amount paid back. (Synonym: zero-interest-bearing notes)

40
Q

non-sufficient-funds (NSF) cheques

A

A bank charge that results when a cheque is written or deposited and the coinciding money does not exist at the time of the deposit

41
Q

Nontrade receivables

A

Written promises entailing an entity to receive, arising from a variety of transactions that are not part of normal business operations

42
Q

Notes receivable

A

Written promises entailing an entity to receive a certain sum of money on a specified

43
Q

Outstanding Cheques

A

Cheques written by a depositor and recorded when written but not recorded or cleared by the bank until the following month

44
Q

percentage-of-receivables approach

A

The process where receivables are recorded on the balance sheet at their net realizable value

45
Q

percentage-of-sales approach

A

The process where costs are matched with revenue because it relates to the charge in the period in which the sale is recorded

46
Q

petty cash

A

A method of keeping cash on hand to cover small amounts where it would not be practical to issue cheques, such as for employee lunches, office supplies, taxi fares, etc

47
Q

premium

A

If a bond sells at more than face value

48
Q

promissory note

A

A written promise that supports a note receivable to pay a certain sum of money at a specified future date

49
Q

receivables turnover ratio

A

A ratio calculated to evaluate the liquidity of a company’s accounts receivable. It measures the number of times, on average, receivables are collected during the period

50
Q

restricted cash

A

Cash that is segregated from “regular” cash for reporting purposes because it needs to be set aside for a particular purpose.

51
Q

sales discounts

A

Cash discounts that are offered by the seller to induce prompt payment

52
Q

sales returns and allowances

A

An amount of sales involving large amounts near the end of the accounting period that should be anticipated and recognized in the period of the sale to avoid distorting the current period’s income statement

53
Q

secured borrowing

A

A creditor may require that a debtor designate (assign) or pledge receivables or other assets as security for the loan, but the assets remain under the control of the borrowing company

54
Q

securitization

A

Where a pool of assets is taken such as credit card receivables, mortgage receivables, or car loan receivables and shares are sold in these pools of interest and principal payments. The effect is to create securities backed by these pools of assets

55
Q

servicing asset component

A

This is recognized if the benefits of servicing (servicing fees under contract, late charges, etc.) are greater than the estimated cost of the obligation

56
Q

servicing liability component

A

This is recorded if the transferor receives no reimbursements for servicing the receivables, or receives less than the estimated cost of doing so

57
Q

stated interest rate

A

The interest rate written in terms of the bond indenture (Synonyms: coupon rate, face or nominal rate).

58
Q

straight-line method

A

The amount of the bond discount or premium is amortized on a constant basis over the life of the bond

59
Q

Trade discounts

A

A reduction in the catalogue price used to avoid frequent changes in catalogues, to quote different prices for different quantities purchased, or to hide the true invoice price from competitors

60
Q

Trade receivables

A

Amounts owed by customers for goods and services rendered as part of the normal course of business operations

61
Q

with recourse

A

Referring to receivables sold via a third party, where the transferor guarantees payment to the seller if the customer fails to pay

62
Q

without recourse

A

Referring to receivables sold via a third party, where the buyer assumes the risk of collection and absorbs any credit losses

63
Q

zero-interest-bearing notes

A

Notes in which the interest is included as part of their face amount instead of stating it explicitly

64
Q

Define financial assets, and identify items that are considered cash and cash equivalents and how they are reported

A

Financial assets are a major type of asset defined as cash, a contractual right to receive cash or another financial asset, an equity holding in another company, or a contractual right to exchange financial instruments under potentially favourable conditions. To be reported as cash, an asset must be readily available to pay current obligations and not have any contractual restrictions that would limit how it can be used in satisfying debts. Cash consists of coins, currency, and available funds on deposit at a bank. Negotiable instruments such as money orders, certified cheques, cashier’s cheques, personal cheques, and bank drafts are also viewed as cash. Savings accounts are usually classified as cash. Cash equivalents include highly liquid short-term investments (i.e., maturing less than three months from the date of purchase) that can be exchanged for known amounts of cash and have an insignificant chance of changing in value. Examples include treasury bills, commercial paper, and money-market funds. In certain circumstances, temporary bank overdrafts may be deducted in determining the balance of cash and cash equivalents.

Cash is reported as a current asset in the balance sheet, with foreign currency balances reported at their Canadian dollar equivalent at the balance sheet date. The reporting of other related items is as follows: (1) Restricted cash: Legally restricted deposits that are held as compensating balances against short-term borrowing are stated separately in Current Assets. Restricted deposits held against long-term borrowing arrangements are separately classified in noncurrent assets either in Investments or Other Assets. (2) Bank overdrafts: These are reported in the Current Liabilities section and may be added to the amount reported as accounts payable. (3) Cash equivalents: This item is often reported together with cash as “cash and cash equivalents.”

65
Q

Define receivables and identify the different types of receivables

A

Receivables are claims held against customers and others for money, goods, or services. Most receivables are financial assets. The receivables are described in the following ways: (1) current or noncurrent; (2) trade or nontrade; and (3) accounts receivable or notes or loans receivable

66
Q

Account for and explain the accounting issues related to the recognition and measurement of accounts receivable

A

Two issues that may complicate the measurement of accounts receivable are (1) the availability of discounts (trade and cash discounts) and (2) the length of time between the sale and the payment due dates (the interest element). Ideally, receivables should be measured initially at their fair value, which is their present value (discounted value of the cash to be received in the future). Receivables that are created by normal business transactions and are due in the short term are excluded from present value considerations.

67
Q

Account for and explain the accounting issues related to the impairment in value of accounts receivable

A

Short-term receivables are reported at their net realizable value—the net amount that is expected to be received in cash, which is not necessarily the amount that is legally receivable. Determining net realizable value requires estimating uncollectible receivables and any future returns or allowances and discounts that are expected to be taken. The adjustments to the asset account also affect the income statement amounts of bad debt expense, sales returns and allowances, and sales discounts. The assessment of impairment is usually based on an aged accounts receivable report, with higher percentages of uncollectible accounts indicated for older amounts outstanding. Even if a company estimates bad debt expense each period as a percentage of sales, the accounts receivable at the balance sheet date are analyzed to ensure the balance in the allowance account is appropriate

68
Q

Account for and explain the accounting issues related to the recognition and measurement of short-term notes and loans receivable

A

The accounting issues related to short-term notes receivable are identical to those of accounts receivable. However, because notes always contain an interest element, interest income must be properly recognized. Notes receivable either bear interest on the face amount (interest-bearing) or have an interest element that is the difference between the amount lent and the maturity value (non-interest-bearing).

69
Q

Account for and explain the accounting issues related to the recognition and measurement of long-term notes and loans receivable

A

Long-term notes and loans receivable are recognized initially at their fair value (the present value of the future cash flows) and subsequently at their amortized cost. Transaction costs are capitalized. This requires amortizing any discount if the item was issued at less than its face value, or any premium if it was issued for an amount greater than its face value, using the effective interest method. The straight-line method may be used under private entity GAAP. Amortization of the discount (premium) results in a reduction of (increase in) interest income below (above) the cash amount received

70
Q

Account for and explain the basic accounting issues related to the derecognition of receivables

A

To accelerate the receipt of cash from receivables, the owner may transfer the receivables to another entity for cash. The transfer of receivables to a third party for cash may be done in one of two ways: (1) Secured borrowing: the creditor requires the debtor to designate or pledge receivables as security for the loan. (2) Sale (factoring or securitization) of receivables: Factors are finance companies or banks that buy receivables from businesses and then collect the remittances directly from the customers. Securitization is the transfer of receivables to a special purpose entity that is mainly financed by highly rated debt instruments. In many cases, transferors have some continuing involvement with the receivables they sell. A financial components approach is used to record this type of transaction: this approach breaks the receivables down into a variety of asset and liability components, and the sold components are derecognized and accounted for separately from the retained ones.

71
Q

Explain how receivables and loans are reported and analyzed

A

Disclosure of receivables requires that valuation accounts be appropriately offset against receivables, that the receivables be appropriately classified as current or noncurrent, and that pledged or designated receivables be identified. As financial instruments, specific disclosures are required for receivables so that users can determine their significance to the company’s financial position and performance and can assess the nature and extent of associated risks and how these risks are managed and measured. Private entities require less disclosure than those reporting under IFRS. Receivables are analyzed in terms of their turnover and age (number of days outstanding), and in terms of relative changes in the related sales, receivables, and allowance accounts.

72
Q

Identify differences in accounting between private entity GAAP and IFRS, and what changes are expected in the near future

A

The two sets of standards are very similar, with minor differences relating to what is included in cash equivalents. Private entity GAAP does not require use of the effective interest method, whereas IFRS does for financial asset investments that are not held for trading purposes. Impairment provisions and the derecogition of financial assets are two issues under study by IFRS; the eventual resolution may generate additional differences in the near future

73
Q

Explain common techniques for controlling cash

A

The common techniques that are used to control cash are as follows: (1) Using bank accounts: A company can vary the number and location of banks and the types of accounts to meet its control objectives. (2) The imprest petty cash system: It may be impractical to require small amounts of various expenses to be paid by cheque, yet some control over them is important. (3) Physical protection of cash balances: Adequate control of receipts and disbursements is part of protecting cash balances. Every effort should be made to minimize the cash on hand in the office. (4) Reconciliation of bank balances: Cash on deposit is not available for counting and is proved by preparing a bank reconciliation

Acct 351 (12 decks)

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