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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
from salaries

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


Cash equivalents

Highly liquid short term investments readily convertible to cash

Mature within 3 months


Restricted cash

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


Compensating balances

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
Borrowing arrangements


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

Short term

Long term


Trade receivables

Most significant item company possesses

Usually accounts receivable and notes receivable


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


Notes receivable

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
associated revenues

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

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)


Composite rate

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


Promissory note

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



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


Secured borrowing

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
Credit losses


Receivables sold with recourse

Seller guarantees payment to purchaser in event debtor fails
To pay


Financial components approach in receivables sold with recourse?

Values assigned to components of:
Recourse provision
Servicing rights
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
During period

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


Days to collect accounts receivable or days outstanding

Days to collect accounts receivable =
365/accounts receivable turnover