Chapter 8 powerpoint Flashcards

1
Q

Accounts Receivable

A

The amounts that customers owe on account, resulting from a sale of goods or services

*expected to be receivedin 30-60 days

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Notes Receivable

A

The claims for which formal instruments of credit are issued as evidence of the debt; the creditor usually requires the debtor to pay interest

*extend for 60-90 days or longer

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Trade Receivables

A

Accounts and Notes Receivable that result from sales transactions

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Other Receivables

A

Non-Trade Receivables, such as Interest Receivable, Loans to Company Officers, Advances to Employees, Income Taxes Refundable

Do not result form operations

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Creating of sales Returns and Allowances line rather than reducing Revenue

A

increases transparency and usefulness for users

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Estimated Uncollectibles

A

The “estimated” amount of claims on customers that companies expect will be uncollectible in the future

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Write-off of Uncollectible Account

A

The “actual” losses from uncollectibles

*company exhausts all means of collecting a past-due account and collection appears unlikely

*The customer is unable to pay to the company the amount due

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Net Realizable Value

A

The net amount a company expects to receive in cash from receivables

Accounts Receivable - Allowance for doubtful accounts (estimated uncollectibles)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Two methods to record uncollectible account:

A
  1. Direct write-off method
  2. Allowance method
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Bad Debts Expense

A

An operating expense on the income statement

Records the resulting losses from uncollectible accounts

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Direct Write-Off Method

A

Bad debts are not estimated and accounts are written-off when deemd uncollectible

Bad debt expense will show only Actual Losses

Accounts Receivable is reported at its gross amount on the balance sheet

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Journal Entry to Record Uncollectibles Using Direct Write-Off Method

A

Bad Debts expense XXX

             Accounts receivable       XXX
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Direct Write-Off Method NOT acceptable under U.S GAAP because:

A

Does not match revenues to expenses, since revenue was earned and recorded prior to determining the uncollectible amount (expense recognition principle)

There is no way to tell the amount of the Accounts Receivable balance that will actually be realized on the balance sheet since we are directly crediting accounts receivable

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Allowance Method

A

Company estimates the value of accounts that will be uncollectible at the end of every reporting period

*follows the expense recognition principle

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Journal Entry for “Estimation of Uncollectibles”

A

Bad Debts Expense XXX

               Allowance for Doubtful Accounts     XXX
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Allowance for Doubtful Accounts

A

Contra asset account ———–Gives users a more accurate picture of the accounts receivable asset

By crediting allowance for doubtful accounts instead of Accounts receivable, accounts receivable is displayed at its cash net realizable value on the balance sheet

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Bad debts expense classified as _______________

A

an operating expense on the income statement

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Journal Entry for a Write-off under Allowance Method

A

Allowance of Doubtful Accounts XXX

                    Accounts Receivable         XXX
19
Q

Journal Entry: If previous written of account is later collected (Allowance Method)

A

Accounts Receivable XXX

    Allowance for Doubtful Accounts        XXX 

Cash XXX

          Accounts Receivable          XXX
20
Q

Two methods to estimate balance of allowance for doubful accounts

A
  1. Percentage of Receivables Method
  2. Aging schedule - more accurate estimate
21
Q

Percentage of Receivables Method

A

Take a percentage of the total Accounts Receivable to estimate the amount uncollectible

22
Q

Journal Entry for Allowance for Doubtful Accounts Adjustment

A

Bad Debts Expense XXX

Allowance for Doubtful Accounts XXX

23
Q

Notes Receivable

A

A promissory is a written promise to pay a specified amount of money on demand or at a definite time

*it is a formal credit instrument

*It is considered notes receivable

*A company generally receives both principle amount plus interest(revenue)

24
Q

Promissory notes may be used:

A

When individuals and companies lend or borrow money

When the amount of the transaction and the credit period exceed normal limits

In settlement of accounts receivable

25
Q

Maturity Date of a Notes Receivable

A
  1. On demand
  2. On a Stated Date
  3. At the End of a Started Period of Time

Hint: in counting, omit the date the note is issued but include the due date

26
Q

Computing Interest

A

Face Value of Note x Annual interest rate x time in terms of one year (360 days)

27
Q

Recognizing Notes Receivable

A

A note receivable is recognized when it is formally accepted by the company

Initially recorded at face value

28
Q

Interest revenue in notes receivable

A

Not reported when the company accepts the note, because the revenue recognition principle does not recognize revenue until earned

Interest is earned (accrued) as time passes

29
Q

Measuring Notes Receivable

A

Valuing short-term notes is the same as valuing accounts receivable

Notes Receivable are reported at their cash (net) realizable value and have an allowane account (allowance for d a)

30
Q

Journal entry when accept a Note Receivable

A

Notes Receivable XXX

          Accounts Receivable   XXX
31
Q

Amount due at maturity

A

The face value of the note plus interest for the length of time specified on the note

32
Q

Journal Entry when disposing honored notes receivalble

A

Cash XXX

              N/R  XXX

                    Interest Revenue XXX
33
Q

Net Credit Sales

A

Net Sales - Cash Sales

34
Q

Notes Receivable may be sold

A

A company would do this to speed up the collection of cash

35
Q

The maker of the note may default (dishonored)

A

A dishonored note is a note that is not paid in full at maturity

Company may negotiate new terms to make it easier to repay debt

36
Q

If a company has significant __________________, it must discuss this rks in the notes to financial statements

A

concentrations of credit risk

37
Q

Receivables turnover ratio

A

Net Credit Sales

Average Net Receivables

38
Q

Average collection period

A

365

Receivables Turnover ratio

39
Q

Accounts Receivable turnover info:

A

To assess the liquidity of the receivables

To measure the number of times, on average, a company collects receivables during the period

40
Q

Average Collection Period Info:

A

To assess the effectiveness of credit and collection policies

The collection period should not exceed credit term period

41
Q

3 reasons for sale of receivable

A

Size of receivable

receivables may be the only reasonable source of cash

Billing and collection of receivables are often time consuming and costly

42
Q

Captive Finance Companies

A

Companies (subsidary company) owned by the company selling the product (parent company)

Purpose: to encourage the sale of the company’s products by assuring financing to buyers

avoids parent company holding large amounts of receivables

43
Q

Journal entry when company factors 600,000 of receivables at 2 percent service charge

A

Cash 588,000

Service charge exp. 12,000

                     Accounts Receivable    600,000
44
Q
A