Ch 7

Question 0

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

Answer 0

Receivables

Question 1

Cash

Answer 1

Most liquid of assets

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

Question 2

Travel advances are treated as?

Answer 2

Receivables, if collected from employees or deducted
from salaries

Or as prepaid expense

Question 3

Postage stamps on hand are treated as?

Answer 3

Offices supplies inventory or prepaid expense

Question 4

Petty cash funds and changes funds are accounted as?

Answer 4

Cash in current assets

Question 5

Cash equivalents

Answer 5

Highly liquid short term investments readily convertible to cash

Mature within 3 months

Question 6

Restricted cash

Answer 6

Classified as either current assets or Longterm assets

depending on date of availability or disbursement

Question 7

Compensating balances

Answer 7

Minimum balances in checking or savings accounts

Constitutes support for existing borrowing arrangements
Of corporation with lending institution

Question 8

What does the SEC recommend to avoid misleading investors about amount of cash available to meet current obligations?

Answer 8

Companies state separately legally restricted deposits
Held as compensating balances against short term
Borrowing arrangements

Question 9

Companies should classify separately restricted deposits
Held as compensating balances against long term borrowing
Arrangements as… What should the caption read?

Answer 9

Non current assets in either investments or other assets
sections

“cash on deposit maintained as compensating balance”

Question 10

Bank overdrafts, define, how should it be accounted for?

Answer 10

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

Question 11

Receivables

Answer 11

Claims held against customers and others for money,

Goods or services

Question 12

Current, non current

Answer 12

Short term

Long term

Question 13

Trade receivables

Answer 13

Most significant item company possesses

Usually accounts receivable and notes receivable

Question 14

Accounts receivable

Answer 14

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

Question 15

Notes receivable

Answer 15

Written promises to pay a certain sum of money

On a specified future date

Question 16

6 examples of non trade receivables?

Answer 16

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

Question 17

6 examples of claims against in nontrade receivables?

Answer 17

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

Question 18

3 Basic issues in accounting for accounts and notes receivable?

Answer 18

Recognition, valuation, disposition?

Question 19

Recognition of accounts receivable: exchange price

Answer 19

Amount due from debtor

Question 20

Why are Trade discounts used?

Answer 20

Avoid frequent changes in catalogs,

alter prices for different quantities purchased,

Hide true invoice price from competitors

Question 21

Cash discounts (sales discounts), example?

Answer 21

Offered to induce prompt payment

Ex. 2/10, n/30; 2% if paid in 10 days, gross amount due 30 days

Question 22

Net realizable value

Answer 22

Net amount expected to receive in cash

Companies value and report short term receivables
At net realizable value

Question 23

Direct write of method

Answer 23

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

Question 24

Benefits of direct write-off method Of uncollectible accounts?

Answer 24

Tax purposes: showing actual losses, simple and convenient

Question 25

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

Answer 25

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

Question 26

Allowance method of accounting for bad debts?

Answer 26

Estimating uncollectible accounts at end of each period Ensures that companies state receivables on balance sheet at net realizable value

Question 27

Net realizable value

Answer 27

Net amount company expects to receive in cash

Question 28

3 essential features of the allowance method for financial reporting purposes?

Answer 28

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

Question 29

Closing entry: Allowance for Doubtful Accounts?

Answer 29

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

Question 30

Bases used to estimate the allowance method? What do they emphasize?

Answer 30

``` 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)

Question 31

Composite rate

Answer 31

Reflects estimate of uncollectible receivables under | Percentage receivables approach

Question 32

Aging schedule of accounts receivable

Answer 32

Applies different percentage based on past experience to | Different age categories

Question 33

Promissory note

Answer 33

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

Question 34

Maker

Answer 34

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

Question 35

Payee

Answer 35

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

Question 36

Interest Bearing notes

Answer 36

Have stated rate of interest

Question 37

Zero-interest bearing notes

Answer 37

Include interest as part Of their face value

Question 38

3 basic issues for accounting for notes receivable?

Answer 38

Recognition, valuation and disposition Same as for accounts receivable

Question 39

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

Answer 39

Present value of cash they expect to collect

Question 40

Implicit interest rate

Answer 40

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

Question 41

Effective interest method?

Answer 41

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

Question 42

Discount on interest bearing note

Answer 42

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

Question 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?

Answer 43

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

Question 44

Imputation? what is the name for the resulting interest rate?

Answer 44

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

Question 45

Valuing short term notes receivable and recording bad debt expense?

Answer 45

Exactly parallel to trade accounts receivable Companies estimate amount of uncollectibles by using Percentage of sales revenue or analysis of receivables

Question 46

Fair value option

Answer 46

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

Question 47

Unrealized holding gain or loss

Answer 47

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

Question 48

Unrealized holding gain

Answer 48

Difference between fair value and carrying amount

Question 49

Any change in value in subsequent periods?

Answer 49

Report unrealized holding gain or loss

Question 50

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

Answer 50

By transferring accounts or notes receivables to | another company for cash

Question 51

Why might a holder sell receivables?

Answer 51

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

Question 52

Why might a purchaser buy receivables?

Answer 52

To obtain legal protection of ownership rights afforded to purchaser of assets versus lesser rights afforded to A secured creditor

Question 53

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

Answer 53

1 secured borrowing | 2 sales of receivables

Question 54

Secured borrowing

Answer 54

Company uses receivables as collateral in borrowing | transaction

Question 55

Sales of receivables: Factors

Answer 55

Factors are finance companies or banks that buy receivables from businesses for a fee and collect remittances directly from customers

Question 56

Sales of receivables: Securitization

Answer 56

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

Question 57

Buying receivables without recourse

Answer 57

Purchaser assumes risk of collectivity and absorbs any | Credit losses

Question 58

Receivables sold with recourse

Answer 58

Seller guarantees payment to purchaser in event debtor fails | To pay

Question 59

Financial components approach in receivables sold with recourse?

Answer 59

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

Question 60

3 conditions for a sale of receivables to occur?

Answer 60

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

Question 61

6 general rules for classifying receivables?

Answer 61

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

Question 62

Accounts receivable turnover ratio, purpose, equation?

Answer 62

Assess liquidity of receivables Number of times on average company collects receivables During period Accounts receivable turnover = net sales/avg. (net) trade receivables

Question 63

Days to collect accounts receivable or days outstanding

Answer 63

Days to collect accounts receivable = | 365/accounts receivable turnover