Cash & Receivables

Question 1

Cash & Cash Equivalents

Answer 1

Includes currency and demand deposits; are short-term, highly liquid investments that are 1) readily convertible to cash or 2) Near maturity when acquired (90 days or less)

Question 2

Cash & Cash Equivalents Excludes

Answer 2

1) CDs with maturity date greater than 90 days

2) Legally restricted deposits

Question 3

What is a Bank Reconciliation?

Answer 3

Represents the difference between the cash balance per the bank and balance per books

Question 4

Steps to a Bank Reconciliation

Answer 4

1) Deposits in Transit
2) Outstanding Checks
3) Service Charges
4) Errors
5) Non-sufficient Funds
6) Interest Income

Question 5

Deposits in Transit on Bank Rec

Answer 5

Funds sent to the bank but not yet recorded by the bank; any deposits made after the bank’s cutoff date will not be included in the bank statement; the balance per the books will be greater than balance per the bank, so add to bank balance in reconciliation

Question 6

Outstanding Checks on Bank Rec

Answer 6

Checks written for payment that have not cleared bank account; bank balance will be greater than book balance so subtract from bank balance

Question 7

Service Charges on Bank Rec

Answer 7

Deducted by bank and will show on bank statement; not recorded in books until made aware - should be subtracted from book balance

Question 8

Errors on Bank Rec

Answer 8

Can be made by either the bank or on the books, so it causes a difference in balances

Question 9

Non-sufficient Funds on Bank Rec

Answer 9

Not enough funds in bank account to clear a written check; The amount charged will be the amount of the check plus a bank fee.

Because the NSF check and the related bank fee have already been deducted on the bank statement, there is no need to adjust the balance per the bank. However, if the company has not yet decreased its Cash account balance for the returned check and the bank fee, the company must decrease the balance per books in order to reconcile.

Question 10

Interest Income on Bank Rec

Answer 10

will appear on the bank statement when a bank gives a company interest on its account balances. The amount is added to the checking account balance and is automatically on the bank statement. Hence there is no need to adjust the balance per the bank statement. However, the amount of interest earned will increase the balance in the company’s Cash account on its books.

Recall “put it where it isn’t.” Interest received from the bank is on the bank statement, but it isn’t on the company’s books. Put it where it isn’t: as an adjustment to the Cash account on the company’s books.

Question 11

Trade Receivables

Answer 11

Oral promises to pay debts from purchasers of a company’s goods/services (nontrade is from nonsales transactions)

Question 12

Net Realizable Value

Answer 12

= Balance of A/R adjusted for allowances that may be uncollectible and sales discounts & returns

Question 13

Accounts Receivable Balance Formula

Answer 13

Beg. A/R
\+ credit sales
- write-offs
-conversion to N/R
- $ collected
= Ending A/R

Question 14

Journal Entry to record A/R on date of sale using the NET METHOD

Answer 14

(Sales of $100,000 2/10, n/30)
Dr. A/R $98,000 (100K x .98)
Cr. Sales $98,000

Question 15

Journal Entry to record A/R if payment is received within n/30 under NET METHOD

Answer 15

(Sales of $100,000 2/10, n/30)
Dr. Cash $98,000
Cr. A/R $98,000
Balance is already netted on date of sale

Question 16

Journal Entry if payment is not received within n/30 under NET METHOD

Answer 16

(Sales of $100,000 2/10, n/30)
Dr. Cash $100,000
Cr. A/R $98,000
Cr. Sales Discounts not taken $2,000 (revenue acct)

Question 17

Journal Entry to record A/R on date of sale using the GROSS METHOD

Answer 17

(Sales of $100,000 2/10, n/30)
Dr. A/R $100,000
Cr. Sales $100,000

Question 18

Journal Entry to record A/R if payment is received within n/30 under GROSS METHOD

Answer 18

(Sales of $100,000 2/10, n/30)
Dr. Cash $98,000
Dr. Sales discounts taken $2,000
Cr. A/R $100,000

Question 19

Journal Entry if payment is not received within n/30 under GROSS METHOD

Answer 19

Dr. Cash $100,000

Cr. A/R $100,000

Question 20

Trade Receivables Discounts

Answer 20

Applied sequentially; price x first discount % = Price after 1st discount x 2nd discount % = A/R balance

Question 21

Journal Entry to record a Sales Return

Answer 21

Dr. Sales Returns and Allowances

Cr. A/R

Question 22

When to record uncollectible A/R

Answer 22

If past experience shows a material % of receivables are returned/uncollectible then allowance of sales returns/uncollectible accounts should be established

Question 23

A/R presentation on the Balance Sheet

Answer 23

At Net Realizable Value

Question 24

Methods of Uncollectible A/R

Answer 24

1) Direct Write-off Method

2) Allowance Method

Question 25

Direct Write-off Method (NOT GAAP)

Answer 25

1) Does not properly match bad debt expense with revenue

2) The A/R account is written off when it becomes uncollectible (not following matching principle)

Question 26

Allowance Method (GAAP) Types

Answer 26

1) % of Sales
2) % of A/R
3) Aging of Receivables

Question 27

Allowance Method - % of Sales

Answer 27

The % of each sale is debited to Bad Debt Expense and credited to an allowance based on the company’s experience

Question 28

Allowance Method - % of Sales Journal Entry

Answer 28

Dr. Bad Debt Expense

Cr. Allowance for Uncollectible Accounts

Question 29

Allowance Method - % of A/R

Answer 29

1) The amount calculated is the ending balance that should be in the allowance on the Balance Sheet
2) There is journal entry at YE to adjust the allowance

Question 30

Allowance Method - % of A/R Journal Entry

Answer 30

Dr. Bad Debt Expense
Cr. Allowance for Uncollectible Accounts

To get the amount:
Required Ending Balance (% x A/R bal.)
- Beginning Balance in Allowance
=Increase in Allowance/ BDE plug for entry

Question 31

Allowance Method - Aging of Receivables

Answer 31

A schedule is made based on the # of days outstanding with each category multiplied by % uncollectible

Question 32

Allowance Method - Aging of Receivables Journal Entry

Answer 32

Dr. Allowance for Doubtful Accounts

Cr. Accounts Receivable

Question 33

Journal Entry for A/R Previously written-off becomes collected under Direct write-off method

Answer 33

Dr. Cash

Cr. Uncollecbtible Accounts Recovered (revenue account)

Question 34

Journal Entry for A/R Previously written-off becomes collected under Allowance method

Answer 34

1) Restore Account Previously written off
Dr. A/R
Cr. Allowance for Uncollectible

2) Record the cash collection
Dr. Cash
Cr. A/R

Question 35

Formula for calculating Allowance for Uncollectible balance

Answer 35

Beginning Balance
\+ Uncollectible during the Year
- Write-offs
= Temporary Balance
- Desired Ending Balance
= Bad Debt Expense 

(If BDE is negative, then debit BDE credit Allow. If BDE is positive, then debit Allow. credit BDE)

Question 36

Pledging Receivables

Answer 36

When existing A/R is used as collateral for a loan but the company retains title and uses the proceeds from A/R to pay the loan; only requires a note disclosure

Question 37

Factoring Receivables

Answer 37

When a 3rd party (factor) is assigned the receivable by giving cash to original seller to cover invoices and assumes the risk; without recourse means sale of receivable is final and original seller no longer assumes any risk; with recourse means receivables can be returned to original seller

Question 38

Notes Receivable

Answer 38

Is a written promise to pay (promissory note) where the maturity (payoff) value = face value of the note + interest