Flashcards in Ch 7 Deck (64):
Most liquid of assets
Standard medium of exchange and basis for measuring
And accounting for all other items
Post dated checks and I.O.U.s are treated as?
Travel advances are treated as?
Receivables, if collected from employees or deducted
Or as prepaid expense
Postage stamps on hand are treated as?
Offices supplies inventory or prepaid expense
Petty cash funds and changes funds are accounted as?
Cash in current assets
Highly liquid short term investments readily convertible to cash
Mature within 3 months
Classified as either current assets or Longterm assets
depending on date of availability or disbursement
Minimum balances in checking or savings accounts
Constitutes support for existing borrowing arrangements
Of corporation with lending institution
What does the SEC recommend to avoid misleading investors about amount of cash available to meet current obligations?
Companies state separately legally restricted deposits
Held as compensating balances against short term
Companies should classify separately restricted deposits
Held as compensating balances against long term borrowing
Arrangements as... What should the caption read?
Non current assets in either investments or other assets
"cash on deposit maintained as compensating balance"
Bank overdrafts, define, how should it be accounted for?
Occur when company writes a check for more than amount
In its cash account
Reported in current liabilities section adding to amount in accounts payable
Claims held against customers and others for money,
Goods or services
Current, non current
Most significant item company possesses
Usually accounts receivable and notes receivable
Oral promises of purchaser to pay for goods and
Open accounts resulting from short term extensions
Of credit normally 30 to 60 days
Written promises to pay a certain sum of money
On a specified future date
6 examples of non trade receivables?
1 advances to officers and employees
2 advances to subsidiaries
3 deposits paid to cover potential damages or losses
4 deposits paid to guarantee performance or payment
5 dividends and interest receivable
6 claims against
6 examples of claims against in nontrade receivables?
1 insurance companies for casualties sustained
2 defendants under suit
3 government bodies for tax refunds
4 common carriers for damage or lost goods
5 creditors for returned, damaged or lost goods
6 customers for returnable items
3 Basic issues in accounting for accounts and notes receivable?
Recognition, valuation, disposition?
Recognition of accounts receivable: exchange price
Amount due from debtor
Why are Trade discounts used?
Avoid frequent changes in catalogs,
alter prices for different quantities purchased,
Hide true invoice price from competitors
Cash discounts (sales discounts), example?
Offered to induce prompt payment
Ex. 2/10, n/30; 2% if paid in 10 days, gross amount due 30 days
Net realizable value
Net amount expected to receive in cash
Companies value and report short term receivables
At net realizable value
Direct write of method
When company determines a particular account to be uncollectible, it charges loss to Bad Debt Expense
Shows only actual losses from uncollectibles
Bad debt expense. 8,000
Accounts receivable. 8000
Benefits of direct write-off method Of uncollectible accounts?
Tax purposes: showing actual losses, simple and convenient
Disadvantages of direct write-off method of uncollectible accounts? When is it appropriate to use?
Fails to record expenses in same period as
receivables aren't stated at net realizable value on
Only appropriate when amount uncollectible is immaterial
Allowance method of accounting for bad debts?
Estimating uncollectible accounts at end of each period
Ensures that companies state receivables on balance
sheet at net realizable value
Net realizable value
Net amount company expects to receive in cash
3 essential features of the allowance method for financial reporting purposes?
1 companies estimate uncollectible A/R, match
estimate expense against revenues recorded in period
2 companies debit estimated uncollectibles to Bad Debt
Expense and credit them to Allowance of Doubtful Accounts
Through adjusting entry at end of each period
3 when companies write off specific account, they debit
actual uncollectibles to Allowance for Doubtful Accounts
And credit amount to accounts receivable
Closing entry: Allowance for Doubtful Accounts?
Companies do not close the Allowance for Doubtful
Accounts at the end of the fiscal year
Bases used to estimate the allowance method? What do they emphasize?
1) percentage of sales approach, emphasis on income
statement Relationships (bad debt expense)
2) percentage of receivables approach, emphasis on balance sheet Relationships (allowance for doubtful accounts)
Reflects estimate of uncollectible receivables under
Percentage receivables approach
Aging schedule of accounts receivable
Applies different percentage based on past experience to
Different age categories
Written promise to pay certain sum of money at specific
Signs negotiable instrument (promissory note) in
Favor of designated payee
May legally and readily sell or transfer (promissory)
note to others
Interest Bearing notes
Have stated rate of interest
Zero-interest bearing notes
Include interest as part Of their face value
3 basic issues for accounting for notes receivable?
Recognition, valuation and disposition
Same as for accounts receivable
Recognition of Notes Receivable: Companies should record and report Longterm notes receivable at...
Present value of cash they expect to collect
Implicit interest rate
Computing interest rate from knowing future amount and
Present value of note
Effective interest method?
Amortizing the discount on zero interest bearing notes
And recognizing interest revenue annually
Discount on interest bearing note
Effective interest rate exceeds stated interest rate
And present value of note is less than face value
When a note is received in exchange for property, goods or services in a bargain transaction, the interest rate is presumed to be fair unless 3 things?
1 no interest rate is stated
2 stated interest ate is unreasonable or
3 face amount of note is materially different from
Current cash sales price for same or similar items
From current value of debt instrument
Imputation? what is the name for the resulting interest rate?
Estimation of present value of note by approximating
Interest rate that may differ from stated interest rate
Resulting interest rate is called imputed interest rate
Valuing short term notes receivable and recording bad debt expense?
Exactly parallel to trade accounts receivable
Companies estimate amount of uncollectibles by using
Percentage of sales revenue or analysis of receivables
Fair value option
Receivables are recorded at fair value, with unrealized
Holding gains or losses reported as part of net income
Unrealized holding gain or loss
Net change in fair value of receivable from one period to
Another, exclusive of interest revenue
Unrealized holding gain
Difference between fair value and carrying amount
Any change in value in subsequent periods?
Report unrealized holding gain or loss
How can an owner accelerate the receipt of cash from receivables?
By transferring accounts or notes receivables to
another company for cash
Why might a holder sell receivables?
Money is tight and access to normal credit is unavailable
Or too expensive
Why might a purchaser buy receivables?
To obtain legal protection of ownership rights afforded to purchaser of assets versus lesser rights afforded to
A secured creditor
2 ways transfer of receivables to a third party for cash happens?
1 secured borrowing
2 sales of receivables
Company uses receivables as collateral in borrowing
Sales of receivables: Factors
Factors are finance companies or banks that buy
receivables from businesses for a fee
and collect remittances directly from customers
Sales of receivables: Securitization
Takes a pool of assets, such as credit card receivables,
Mortgage receivables or car loan receivables,
Sells shares in these pools of interest and principal payments
Buying receivables without recourse
Purchaser assumes risk of collectivity and absorbs any
Receivables sold with recourse
Seller guarantees payment to purchaser in event debtor fails
Financial components approach in receivables sold with recourse?
Values assigned to components of:
Agreement to reacquire
3 conditions for a sale of receivables to occur?
1 sale of assets isolated from transfer or
2 transferee has right to pledge or sell assets
3 transfer or does not maintain control through repurchase
6 general rules for classifying receivables?
1 segregate different types of receivables company
2 appropriately offset valuation accounts against proper receivables accounts
3 determine receivables in current assets section
Will be converted to cash within 1 year
4 disclose any loss contingencies that exist on receivables
5 disclose any receivables designated or pledged as collateral
6 disclose nature of credit risk in receivables, how risk is
Analyzed, assessed in arriving at allowance for credit losses
Accounts receivable turnover ratio, purpose, equation?
Assess liquidity of receivables
Number of times on average company collects receivables
Accounts receivable turnover =
net sales/avg. (net) trade receivables