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Flashcards in Ch. 7 Deck (94):
1

Cash is

The most liquid

Is the standard medium of exchange and basis for measuring and accounting for all items

2

Cash consists of

Coin, currency and available funds on deposit at the bank

3

Negotiable instruments such as money orders, certified checks, cashiers checks, personal checks and bank drafts are viewed as

Cash

4

Temporary investments include

Money market funds

Money market savings certificates

Certificates of deposits

Similar types of deposits and short term paper

5

Companies treat postdated checks and I.O.U.'s as

Receivables

6

Travel advances are treated as receivables if

Collected from employees or deducted from their salaries , otherwise treated as prepaid expense

7

Petty cash funds and change funds are used to

Meet current operating expenses and liquidate current liabilities, companies include these funds in current assets as cash

8

Cash equivalents

Short term highly liquid investments that are

A) readily convertible to known as amounts of cash

B) near maturity that they present insignificant rod of changes in values because of changes in interest rates

Only investments with original maturities of theee month or less qualify under these conditions

9

Are cash equivalents always cash?

No

10

What are examples of cash set aside?

Petty cash, payroll and dividend funds

In most situations these are not material

11

Restricted cash

When material in amount companies segregate restricted cash from regular cash for reporting purposes

12

Restricted cash is classified as

Current assets
-- if using cash for payment of existing or maturing obligations (within a year or operating cycle whichever is longer)

Or

Long term assets
-- reported on the balance sheet if holding cash for a long period of time

13

Compensating balances

Minimum balances

As the portion of any demand deposit or time deposit or certificate of deposit maintained by a corporation which constitutes support for existing borrowing arrangements of the corporation with lending institution

14

Sec recommends companies to state separately legally restricted deposits held as compensating balances against short term vitrine arrangements among cash and cash equivalents items in current assets because

To avoid misleading investors about amount of cash available to meet recurring obligations

15

Bank overdraft

Occur when a company writes a check for more than the amount in it cash account

16

Bank overdrafts should be reported where?

Current liabilities section, adding them to amount reported as accounts payable

17

Receivables

(Often referred to as loans and receivables )

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

18

Companies classify receivables as either

Current (short term)

Noncurrent (long term)

19

Companies expect to collect current receivables

Within a year or during current operating cycle, whichever is longer

Other receivables are classified as noncurrent

20

Trade receivables

Customers often owe a company amounts for goods bought or services rendered

21

Accounts receivables

Oral fpromises of purchaser to pay for goods and services sold

22

Accounts receivables are represented as

Open accounts ,

Usually collected within 30-60 days

23

Notes receivables

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

24

Non trade receivables examples

1. Advances to officers and employees

2. Advances to subsidiaries

3. Deposits paid to cover potential damages or losses

4. Deposits paid as a guarantee of payment or performance

5 dividends and interest receivable

6. Claims against
Insurance companies cornxasualities sustained
Defendants under suit
Governmental bodies for tax refunds
Common carriers for damages or lost goods
Creditors for returned damaged or lost goods
Customers for returnable items

25

The concept of control is the deciding factor in determining when

Performance obligation is satisfied and an account receivable recognized

26

Transaction price

Mount of consideration that a company expects to receive from a customer in exchange for transferring goods or services

27

Trade discounts

To avoid frequent changes in date logs, alter prices for different quantities purchased or to hide true invoice price from competitors

28

Trade discounts are commonly quoted in

%

29

Cash discounts (sales discount)

Induces prompt payment

30

Companies should record accounts receivables and related revenue at the amount of

Consideration expected to be received from customer

31

Net method

Attempts to value receivables at its net realizebale values

32

Use gross method bc

Companies may not use net method for practicability reasons

Net method requires additional analysis and book keeping

33

Sales returns and allowances

Contra revenue account to sales revenues and offsets sales revenue on income statement

34

Allowance for sales returns and allowances is

Contra asset account to acct receivables and offsets accounts receivables on balance sheet

35

Time values of money

Ideally company should measure receivables in terms of present value that is discounted value of cash To be received in the future

36

Interest revenue

Is any revenue after the period of sale

37

Interest revenue is often ignored related to account receivables bc

It is not material in relation to net income for period

38

Two methods for uncollectible accounts

Direct write off method

Allowance method

39

Under direct write off method, bad debt expense will show

Direct method shows

Actual losses from uncollectibles


Determines a particular account to be uncollectible

40

Supporters of direct method say that it records

Facts not estimates

41

Direct method is deficient because

It fails to record expenses in same period as associated revenues

Nor

Does it result in receivables being stated at net realizable value on balance sheet

42

Direct write off method is not considered appropriate except

When the amount uncollectible is immaterial

43

Allowance method

Accounts for bad debts involves estimating uncollectible accounts at the end of each period

44

Allowance method ensures that companies state receivables on balance sheet at their

Net realizable values

45

Net realizable value

Is the net amount the company expects to receive in cash

46

Companies estimate uncollectible accounts and net realizable value using

Information about past and current events as well as forecasts of future collectibility

47

Companies use contra asset accounts because

They do not know which customers will not pay

48

Companies do not close allowance for doubtful accounts at the end of fiscal year

T or f

True

49

When should a company write off an account?

When companies have exhausted all means of collecting a past due account and collection appears impossible

50

When a write off occurs , bad debt expense does not

Increase

51

Under allowance method, companies debit write off account to

Allowance account rather than bad debt expense

52

Recovery of bad debt, like the write off bad debt affects only

Balance sheet accounts

53

Expected uncollectible accounts are estimated

Based on info on past events(loss experience), adjusted fro current conditions and reasonable forecasts of factors that would affect uncollectible accounts w

54

Percentage of receivables approach

Estimate % of outstanding receivables that will become uncollectible

55

Composite rate

Reflects an estimate of uncollectible receivables

56

Aging schedule

Of acct receivables which applies different % based on past experience to various age categories

57

Aging schedule is gl determine

Determine Bad debt expense

Prepare it as control device to determine composition of receivers and identify delinquent accounts

58

Note receivables supported by promissory note,

A written promise to pay a certain sum of money at a specific future date

59

Interest bearing notes have

Stated rate of interest

60

zero interest bearing notes

Include interest as part of face amount

61

Note receivables are considered

Fairly liquid even if long term bc companies may easily convert them to cash

62

Companies frequently accept notes receivables form customers who

Need to extend the payment period of an outstanding receivables

63

The basic issues in accounting notes receivable are same as those for account receivables

Recognition, valuation and disposition

64

Companies record and report long term notes receivable at

Present value of cash they expect to collect

65

If a company receives a zero interest bearing note, its

PV is the cash paid to issuer

66

Can compute interest rate when you know both

FV and PV

67

Interest bearing notes

Stated and effective rate differ

True

68

When a note is received in exchange for propert, goods or services in a bargained transaction, the state interest rate is fair unless

No interest rate is stated

Or

The stated interest rate is unreasonable

Or

Face amount of note is materially different from current cash sales price for same or similar items or from current FV of debt instrument

69

Imputed interest rate

Resulting interest rate



70

Imputation

Process of interest rate approximation

71

Short term notes receivables are reported at

Net realizable value

72

Fair value option

The option to us FV as basis of measurement in financial statements

73

FV is more relevant than historical cost bc

It reflects current cash equivalent value of financial instruments

74

If fair value option is chosen

The receivables are record at FV, with unrealized holding gains or losses reported as part of net income

75

Unrealized holding gain or loss

Net change in FV of receivables from one period to another, exclusive of interest revenue

76

Any change in fair value is reported as

Unrealized holding gain or loss

77

In order to accelerate the crops of cash from receivables,

The owner may transfer accounts or notes receivables to another company for cash

78

Reasons for transferring accounts

1. Competitive reasons
2. Holder may sell receivables bc money is tight
3. Billing and collection of receivables are often time consuming and costly

79

The transfer of receivables to a third party for cash happens in one of 2 ways

Sales receivables

Secured borrowing

80

A common type of sales of receivables

Sale to a factor

81

Factors are

Finance companies or banks that buy receivables from businesses for a fee and then collect remittances directly from customers

82

Companies sell receivables on either

Without recourse

Or

With recourse

83

Sale without recourse (non recourse)

Seller assumes no responsibility for any credit losses associated with transferred receivables

84

Sales with recourse

Seller guarantees payment to purchaser in event the debtor fails to pay

To record this transaction, seller uses financial components approach bc seller has a continuing involvement with receivables

85

Secured borrowing

Uses receivables as collateral in a borrowing transaction

86

The three conditions must be met b4 a company can record sale

1. Transferred asset has been isolated from transferor

2. Transferees have obtained right to pledge or sell assets

3. Transferor does not maintain effective control through repurchase agreement

87

Presentation of receivables

Pg 350

88

Companies are required to disaggregate based on type of

Receivables

89

Companies must disclose concentrations of credit frisk for all financial instruments

:)

90

Accounts receivable turnover

Assess liquidity of receivables

Measures the # of times, on average a company collects receivables during a period

91

Reconciling items

Deposit in transit
-- end of month deposits of cash recorded on depositors books in one month received and recorded by bank

Outstanding checks
--checks written by depositor are recorded when written but may not be recorded by bank until next month

Bank charges
--charges recorded by bank against depositors balance for such items as bank services, printing checks, NSF and safe deposit box rentals. Depositor may not be aware of changes until receipt of bank statement

Bank credits
-- collections or deposits by Bank for benefit of depositors that may be unknown to depositor until receipt of bank statement

Bank or depositor errors
-- errors on the part of bank or part of depositor cause bank balance to disagree with depositors book balance

92

Cash short & over used

When petty cash fund fails to prove out.

93

If cash prove short

It is debited as shortage to cash over and short account

94

If cash proves over

It is credit to overage to cash over and short