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Flashcards in Ch 7 Deck (64):
0

Cash

Most liquid of assets

Standard medium of exchange and basis for measuring
And accounting for all other items

1

Post dated checks and I.O.U.s are treated as?

Receivables

2

Travel advances are treated as?

Receivables, if collected from employees or deducted
from salaries

Or as prepaid expense

3

Postage stamps on hand are treated as?

Offices supplies inventory or prepaid expense

4

Petty cash funds and changes funds are accounted as?

Cash in current assets

5

Cash equivalents

Highly liquid short term investments readily convertible to cash

Mature within 3 months

6

Restricted cash

Classified as either current assets or Longterm assets
depending on date of availability or disbursement

7

Compensating balances

Minimum balances in checking or savings accounts

Constitutes support for existing borrowing arrangements
Of corporation with lending institution

8

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
Borrowing arrangements

9

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
sections

"cash on deposit maintained as compensating balance"

10

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

11

Receivables

Claims held against customers and others for money,
Goods or services

12

Current, non current

Short term

Long term

13

Trade receivables

Most significant item company possesses

Usually accounts receivable and notes receivable

14

Accounts receivable

Oral promises of purchaser to pay for goods and
services sold

Open accounts resulting from short term extensions
Of credit normally 30 to 60 days

15

Notes receivable

Written promises to pay a certain sum of money
On a specified future date

16

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

17

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

18

3 Basic issues in accounting for accounts and notes receivable?

Recognition, valuation, disposition?

19

Recognition of accounts receivable: exchange price

Amount due from debtor

20

Why are Trade discounts used?

Avoid frequent changes in catalogs,

alter prices for different quantities purchased,

Hide true invoice price from competitors

21

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

22

Net realizable value

Net amount expected to receive in cash

Companies value and report short term receivables
At net realizable value

23

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

24

Benefits of direct write-off method Of uncollectible accounts?

Tax purposes: showing actual losses, simple and convenient


25

Disadvantages of direct write-off method of uncollectible accounts? When is it appropriate to use?

Fails to record expenses in same period as
associated revenues

receivables aren't stated at net realizable value on
balance sheet

Only appropriate when amount uncollectible is immaterial

26

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

27

Net realizable value

Net amount company expects to receive in cash

28

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

29

Closing entry: Allowance for Doubtful Accounts?

Companies do not close the Allowance for Doubtful
Accounts at the end of the fiscal year

30

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)

31

Composite rate

Reflects estimate of uncollectible receivables under
Percentage receivables approach

32

Aging schedule of accounts receivable

Applies different percentage based on past experience to
Different age categories

33

Promissory note

Written promise to pay certain sum of money at specific
Future date

34

Maker

Signs negotiable instrument (promissory note) in
Favor of designated payee

35

Payee

May legally and readily sell or transfer (promissory)
note to others

36

Interest Bearing notes

Have stated rate of interest

37

Zero-interest bearing notes

Include interest as part Of their face value

38

3 basic issues for accounting for notes receivable?

Recognition, valuation and disposition

Same as for accounts receivable

39

Recognition of Notes Receivable: Companies should record and report Longterm notes receivable at...

Present value of cash they expect to collect

40

Implicit interest rate

Computing interest rate from knowing future amount and
Present value of note

41

Effective interest method?

Amortizing the discount on zero interest bearing notes
And recognizing interest revenue annually

42

Discount on interest bearing note

Effective interest rate exceeds stated interest rate
And present value of note is less than face value

43

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

44

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

45

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

46

Fair value option

Receivables are recorded at fair value, with unrealized
Holding gains or losses reported as part of net income

47

Unrealized holding gain or loss

Net change in fair value of receivable from one period to
Another, exclusive of interest revenue

48

Unrealized holding gain

Difference between fair value and carrying amount

49

Any change in value in subsequent periods?

Report unrealized holding gain or loss

50

How can an owner accelerate the receipt of cash from receivables?

By transferring accounts or notes receivables to
another company for cash

51

Why might a holder sell receivables?

Money is tight and access to normal credit is unavailable
Or too expensive

52

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

53

2 ways transfer of receivables to a third party for cash happens?

1 secured borrowing
2 sales of receivables

54

Secured borrowing

Company uses receivables as collateral in borrowing
transaction

55

Sales of receivables: Factors

Factors are finance companies or banks that buy
receivables from businesses for a fee

and collect remittances directly from customers

56

Sales of receivables: Securitization

Takes a pool of assets, such as credit card receivables,
Mortgage receivables or car loan receivables,

and
Sells shares in these pools of interest and principal payments

57

Buying receivables without recourse

Purchaser assumes risk of collectivity and absorbs any
Credit losses

58

Receivables sold with recourse

Seller guarantees payment to purchaser in event debtor fails
To pay

59

Financial components approach in receivables sold with recourse?

Values assigned to components of:
Recourse provision
Servicing rights
Agreement to reacquire

60

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
Agreement

61

6 general rules for classifying receivables?

1 segregate different types of receivables company
possesses
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

62

Accounts receivable turnover ratio, purpose, equation?

Assess liquidity of receivables

Number of times on average company collects receivables
During period

Accounts receivable turnover =
net sales/avg. (net) trade receivables

63

Days to collect accounts receivable or days outstanding

Days to collect accounts receivable =
365/accounts receivable turnover