Chapter 7 Flashcards Preview

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Flashcards in Chapter 7 Deck (27):

Short-term, highly liquid investments that can be readily converted to cash with little risk of loss

Cash Equivalents


A company's plan to encourage adherence to company policies and procedures, promote operational efficiency, minimize errors and theft, and enhance the reliability and accuracy of accounting data

Internal Control


An internal control technique where various functions are distributed amongst employees to provide cross-checking that encourages accuracy and discourages fraud

Separation of Duties


A specified balance a borrower of a loan is asked to maintain in a low-interest or noninterest-bearing account at the bank

Compensating Balance


Percentage reduction from the list price

Trade Discounts


Represent reductions not in the selling price of a good or service but in the amount to be paid by a credit customer if paid within a specific period of time

Cash Discounts


For the buyer, views a discount not taken as a part of the cost of the inventory. For the seller, views a discount not taken by the customer as part of the sales revenue

Gross Method


For the buyer, considers the cost of inventory the include the net, after-discount amount, and any discounts not taken are reported as interest expense. For the seller, considers sales revenue to be the net amount, after discount, and any discounts not taken by the customer as interest revenue

Net Method


The return of merchandise for a refund or for credit to be applied to other purchases

Sales Return


An operating expense incurred to boost sales; inherent cost of granting credit

Bad Debt Expense


The amount of cash the company expects to actually collect from customers

Net Realizable Value


Recording bad debt expense and reducing accounts receivable indirectly by crediting a contra account to accounts receivable for an estimate of the amount that eventually will prove uncollectible

Allowance Method


Estimating bad debt expense as a percentage of each period's net credit sales; usually determined by reviewing the company's recent history of the relationship between credit sales and actual bad debts

Income Statement Approach


Determination of bad debt expense by estimating the net realizable value of accounts receivable to be reported in the balance sheet

Balance Sheet Approach


Applying different percentages to accounts receivable balances depending on the length of time outstanding

Accounts Receivable Aging Schedule


An allowance for uncollectible accounts is not used; instead bad debts that do arise are written off as bad debt expense

Direct Write-off Method


Notes that bear interest, but the interest is deducted from the face value to determine the cash proceeds made available to the borrower at the outset

Noninterest-bearing Notes


Operational Assets should be written down if blank has become significant

Impairment of Value


Trade receivables in general rather than specific receivables as collateral; the responsibility for collecting the receivables remains solely with the company



Using receivables as collateral for loans where specific receivables go directly toward repayment of a debt if that debt goes unpaid



Financial institution that buys receivables for cash, handles the billing and collection of the receivables, and charges a fee for this service



The company creates a special purpose entity that buys a pool of trade receivables, credit card receivables, or loans from the company and then sells related securities



The buyer assumes the risk of bad debts

Without Recourse


The seller retains the risk of uncollectibility

With Recourse


The transfer of a note receivable to a financial institution



Comparison of the bank balance with the balance in the company's own records

Bank Reconciliation


The original terms of a debt agreement are changed as a result of financial difficulties experienced by the debtor

Troubled Debt Restructuring