Flashcards in Chapter 7 Deck (114):
To be classified as cash equivalents, these investments must have a maturity date no longer than:
3 months from the date of purchase
What are cash equivalents?
Cash equivalents are short-term, highly liquid investments that can be readily converted to cash.
Internal control refers to a company's plan to:
1. encourage adherence to company policies and procedures
2. promote operational efficiency
3. minimize errors and theft
4. enhance the reliability and accuracy of accounting data
What is important in creating internal control procedures for cash receipts?
Separation of duties is critical. Employees involved in record-keeping should not also have physical access to the assets.
What is important in creating internal control procedures for cash disbursements?
1. All disbursements, other than very small disbursements from petty cash, should be made by check.
2. All expenditures should be authorized before a check is prepared.
3. Check should be signed only by authorized individuals.
What is restricted cash?
Restricted cash is cash that has been set aside for a particular use (i.e. future plant expansion, future payment of debt) and is not available for paying current liabilities.
What is a compensating balance?
A compensating balance is some specified minimum amount that must be maintained on deposit with a bank that has made a loan to the company.
If restricted cash is available for current operations or to pay current liabilities, it's classified as __________; otherwise, it's classified as __________.
investments and funds or other assets
What are receivables?
Receivables represent a company's claims to the future collection of cash, other assets, or services.
When is revenue and related accounts receivable recognized?
They are recognized at the point of delivery of the product or service.
How are accounts receivables initially valued?
The receivables are initially recorded at the exchange price agreed upon by the buyer and the seller.
What are cash discounts?
Often called sales 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 specified period of time.
What is a trade discount?
It is the reduction of the list or regular price in return for the purchase of large quantities, also called quantity discount or price discount.
What is the gross method?
The gross method views cash discounts not taken as part of sales revenue.
What is the net method?
The net method considers cash discounts not taken as interest revenue.
What is accounts receivable classified as?
Almost always classified as a current asset.
What is a sales return?
When merchandise is returned for a refund or for credit to be applied to other purchases.
Recognizing sales returns when they occur could result in an __________ in the period of the related sale.
overstatement of income
The estimated expense for accounts that may not be collected that is matched against revenue of the period is referred to as:
bad debt expense
What is accounts receivable?
Receivables resulting from the sale of goods or services on account. They are an INFORMAL credit agreement with trade customers supported by an invoice and normally are due in 30 to 60 days after the sale.
What is notes receivable?
It is a FORMAL credit arrangement between borrower and lender.
The two most common types of selling arrangements for accounts receivable are:
Securitization and Factoring
On which financial statement is the account "cash and cash equivalents" reported?
The two methods used for recording sales discounts are the __________ method and the __________ method.
gross & net
What is discounting?
The transfer of a note receivable to a financial institution.
When estimated returns are material, they are recognized:
during the year of sales
When estimated returns are immaterial, they are recognized:
in the period they occur
1. currency and coins
2. balances in checking accounts
3. checks and money orders received from customers (items acceptable for deposit in these accounts)
What are the steps in determining the impairment of receivables under IFRS (International Financial Reporting Standards)?
1. Consider whether individual significant receivables are impaired.
2. Group individual significant receivables for which impairment is not indicated with other receivables of similar risk characteristics.
3. Perform impairment test.
What is the formula for Interest-Bearing Notes?
Face amount * Annual rate * Fraction of the annual period
Joyce Corp. uses the percent of credit sales method to account for bad debt expense. Joyce determines that a customer account of $20,000 should be written off as uncollectible. The journal entry should be written as:
Debit: Allowance for uncollectible accounts - $20,000
Credit: Accounts receivable - $20,000
The direct write-off method is normally not permitted for U.S. GAAP reporting because it violates the __________ principle.
The numerator of the quick ratio eliminates which current assets?
Inventory & Prepaid expenses
What is the impairment indicator for the IFRS?
Objective evidence exists that a loss event will affect future cash flows and can be measured reliably.
A secured borrowing occurs when accounts receivable are __________ or __________ as collateral for a loan.
pledged & assigned
Gross accounts receivable - Allowance for doubtful accounts =
NET REALIZABLE VALUE (NRV) of accounts receivable
If the restriction is legally binding, the compensating balance can be classified as:
current and non current assets
If the compensating balance is informal with no contractual agreement that restricts the use of cash, it can be classified as:
Cash and Cash equivalents
During the prior year, Marlan Company recognized an impairment loss on its notes receivables. During the current year, the amount of estimated future cash flows improved. Marlan should:
recognize a gain
Accounts receivable sold with the risk of nonpayment by customers assumed by the transferor of the receivables is a sale __________ recourse; whereas, receivables sold with the risk of nonpayment assumed by the transferee is a sale __________ recourse.
with & without
Garcia sells goods to a customer for $100,000 on a non-interest-bearing, 180-day not receivable. The discount rate is 12%. The effective interest rate for this not is (use 360 days for the year):
$100,000 * 0.12 * (6/12) = $6,000 (Interest for 6 months)
$100,000 - $6,000 = $94,000 (Sales Price)
$6,000/$94,000 = 0.0638 (Rate for 6 months) * 2 (to annualize the rate)
= 0.1276 ~ 12.76% (Effective interest rate)
(Beg. Bal.) - $100,000 (End Bal.) - $140,000
Allowance for Uncollectible Accounts:
(Beg. Bal.) - $15,000 (End Bal.) - $18,000
During the year, Connor wrote off $17,000 of accounts receivable that were uncollectible. The adjustment to record bad debt expense at the end of the period was:
Debit: Bad Debt Expense: $20,000 (i.e. $18,000 + $17,000 - $15,000)
Credit: Allowance for uncollectible accounts: $20,000
What responsibilities are separated in a good internal control system for cash disbursements?
1. Check writing
2. Check signing
3. Cash disbursement documentation
4. Accounting recording function
What are two instances where it is required for cash to be restricted?
1. Requirements to set aside funds to repay debt
2. Requirement to use cash for future plant expansion
What is the income statement approach?
We estimate bad debt expense as a percentage of each period's net credit sales.
Two entries are required when a previously written-off account is paid. These two entries include:
(Reinstate the account receivable)
Debit: Accounts receivable
Credit: Allowance for uncollectible accounts
(To record cash collection)
Credit: Accounts receivable
What is the secured borrowing approach?
The transferor (borrower) simply acts like it borrowed money from the transferee (lender), with the receivables remaining in the transferor's balance sheet and serving as collateral for the loan.
What is the sales of receivables approach?
The transferor (seller) transfers the rights and risks of the receivable to the transferee (buyer).
On June 1, Tulip Corp. provided services on account to Daffodil. Tulip agreed to accept a $40,000, 10%, 3-month interest-bearing note from Daffodil in payment for the services. The entry required on Tulip's books on June 1 would include:
Debit: Note receivable - $40,000
Credit: Sales revenue - $40,000
(To record the sales of goods in exchange for a note receivable)
Cash that is restricted and is not available for current use may be reported in the balance sheet as:
a non-current asset such as investments and funds or other assets
If Company A sells accounts receivable without recourse to ABC Finance and the customer cannot pay, who assumes the risk of bad debts?
Kraven Corp. borrows $100,000 by signing on a 1-year, 8% promissory note from General Finance Company and assigns $120,000 of its accounts receivable as collateral for the loan. General Finance charges a financing fee of 1% of the receivable assigned. The journal entry for Kraven to record the borrowing includes:
Debit: Cash (difference) - $98,800 ($100,000 - $1,200)
Debit: Finance charge expense - $1,200 ($120,000 * 0.01)
Credit: Liability - Financing arrangement - $100,000
Abby Company has three bank accounts with the following balances:
Account #1: $20,000
Account #2: $40,000
Account #3: $10,000 Overdrawn
If Abby Company applies IFRS, it will report cash of:
What transactions will require a credit to accounts receivable?
1. Customer defaults and does not pay
2. Sale on account is returned by a customer
The __________ on notes receivable is a contra account.
The two conditions that must exist for a sale and the related receivable to be recognized are:
1. the earnings process is virtually complete
2. collection from the customer is reasonably assured
Amounts readily available to pay off debt or used in operations are considered __________, while highly liquid investments with a maturity date of 3 months or less are considered __________.
Cash & Cash equivalents
In a sale of an accounts receivable with recourse, if the customer does not pay, the loss is assumed by the __________ of the accounts receivable.
If a company believes its sales returns will be material, an adjusting entry for expected returns should be made to which account?
Debit: Allowance for sales returns
Credit: Accounts receivable
__________ is a measure of a company's cash position and its overall ability to obtain cash in the normal course of business.
A __________ discount is not recognized directly when recording a sale.
Financing receivables can be done by a __________ approach.
secured borrowing approach
What is securitization?
A type of arrangement used to sell receivables wherein a "special purpose entity" (SPE) is created for the purpose of purchasing pools of receivables.
Companies finance with their receivables to:
1. Increase cash flow
2. Receive cash before customer would pay amounts due
3. Shorten the operating cycle
4. Avoid servicing receivables
True or false: A sale of an accounts receivable results in removing the accounts receivable from the balance sheet.
Adrian Corp. sells goods on account for $100,000 on May 1. On May 15, the customer returns $40,000 of the merchandise. The customer has not yet paid for any of the goods. What will Adrian record on May 15?
Debit: Sales returns - $40,000
Credit: Accounts receivable - $40,000
A partial transfer in accounts receivable is treated as a secured borrowing, unless the amount transferred qualifies as a __________, which is defined as sharing proportionally in the cash flows of the receivable and having equal rights with respect to the receivables.
What is an accounts receivable aging schedule?
A schedule that classifies accounts receivable based on length of time outstanding.
Consistent with IFRS, determining whether risks and rewards have been transferred is evaluated by comparing how variability in the amounts and timing of the __________ of the transferred assets effects the company before and after transfer.
A note receivable is __________ when it is probable that a creditor will be unable to collect all amounts according to the terms of the contract.
What ratios measures liquidity?
1. quick ratio
2. current ratio
Which method (IFRS or U.S. GAAP) permit the offsetting of bank overdrafts against cash balances?
In the sale of an accounts receivable without recourse, if the customer does not pay, the loss is assumed by the __________ of the accounts receivable.
Income tax receivable is a __________ receivable.
True or false: When specific receivables are assigned, the financing liability should be netted against the accounts receivable account.
A transfer of a receivable qualifies as a sale if the transferor:
surrenders control over the assets transferred
The sale of accounts receivable requires:
1. remove the accounts receivable from the balance sheet
2. recognize the fair value of assets acquired or liabilities assumed
3. record the difference as a gain or loss
A note received solely for cash is valued at:
its present value, which is the cash amount
Riley has a $100,000 not receivable from a customer. The note receivable is an 8% not, due in 9 months. Three month after accepting the note, Riley discounts the note receivable at Third Bank at a discount rate of 10%. What are the cash proceeds of the discounted note?
$100,000 (Face amount) + $6,000 ($100,000 * 0.08 * 9/12) (Interest)
= $106,000 (Maturity value) - $5,300 ($106,000 * 0.1 * 6/12) (Discount)
= $100,700 (Cash proceeds)
What is the journal entry for the adjustment for estimated sales returns?
Debit: Allowance for sales returns
Credit: Accounts receivable
When a company borrows money by signing a non-interest bearing note, the amount of cash received at the inception of the loan is referred to as the __________ of the note.
__________ accounts receivable requires no special account treatment, whereas __________ accounts receivables requires netting a liability against the accounts receivables.
Pledging & Assigning
Management can influence credit and collections by:
1. Offering cash discounts
2. Extending payment terms
The financial ratios most often used to analyze accounts receivable are:
1. accounts receivable turnover
2. average collection period
When the direct write-off method is used, an entry for bad debt expense is required when:
the account receivable is determined to be uncollectible
The balance sheet approach to measuring bad debt expense focuses on:
net realizable value of accounts receivable
Notes receivable is valued on the balance sheet at the:
present value of future cash receipts
Tudor Corp. has an ending balance in the accounts receivable account of $20,000. Tudor recorded bad debt expense of $1,000. Tudor has an ending balance in the allowance for uncollectible accounts of $2,000. What is the net realizable value of accounts receivable?
$18,000 ($20,000 - $2,000)
Kelly borrows $11,000 from the bank at an interest rate of 8%. If the bank requires a compensating balance of $1,000, the effective rate of interest on the loan is:
$11,000 * 0.08 = $880
$11,000 - $1,000 (Compensating balance) = $10,000
$880/$10,000 = 0.088 ~ 8.8% (Effective rate of interest)
00-30 days - $200,000 -- 0.5%
30-60 days - $100,000 -- 1%
60-90 days - $50,000 -- 2%
Over 90 days - $40,000 -- 6%
Length of time outstanding - A/R balance -- Percentage estimated U/A
-- Determine the ending balance for uncollectible accounts --
$200,000 * 0.005 = $1,000
$100,000 * 0.01 = $1,000
$50,000 * 0.02 = $1,000
$40,000 * 0.06 = $2,400
-- Total = $5,400 --
IFRS refers to the allowance for uncollectible accounts as a __________ for bad debts.
Internal control over cash is important because cash:
can be stolen
How do companies estimate returns?
1. Changes in customer base
2. Payment terms offered to customers
3. Overall economic conditions
What are the conditions for a transfer of receivables to be treated as a sale?
1. The assets are isolated and beyond the reach of the transferor
2. The transferee has the right to pledge or exchange the assets
3. The transferee surrenders control of the asset
Sully Corporation uses an income statement approach for accounting for bad debt expense. Sully estimates that 2% of sales will eventually become uncollectible. If Sully has $100,000 of sales during the year, the adjustment for estimated uncollectible accounts will require the following entry:
Debit: Bad debt expense - $2,000
Credit: Allowance for uncollectible accounts - $2,000
Where is note receivable reported in the balance sheet?
in either current or non current assets, as appropriate
The reconciliation process for cash receipts require that the amount received from customers should agree with:
the accounting records
What is the allowance method?
Report accounts receivable net of the allowance and describe the allowance in the notes to financial statements.
Accounts receivable are initially recorded at the exchange price agreed upon by the buyer and seller and subsequently reduced to net realizable value by?
1. allowance for sales returns
2. allowance for uncollectible accounts (i.e. income statement and balance sheet approaches)
Kilroy uses the net method to record sales on account. Kilroy sells goods on account for $1,000 with terms 2/10 n/30. The journal entry to record this transaction will be:
Debit: Accounts receivable - $980 ($1,000 * 0.02 = $20)
Credit: Sales revenue - $980 (continued ... $1,000 - $20 = $980)
Management should hold the minimum amount of cash to:
1. Conduct business operations
2. Meet its obligations
3. Take advantage of opportunities
The objectives of the Committee of Sponsoring Organizations (COSO) on internal control are to achieve:
1. Effectiveness and efficiency of operations
2. Reliability of financial reporting
3. Compliance with laws and regulations
What accounts would an analyst investigate to detect if accounts receivable may impact earnings quality?
1. bad debt expense
2. allowance for uncollectible accounts
A compensating balance results in an effective interest on the loan that is __________ then the stated rate on the debt.
If sales returns are material, what should the journal entry be?
Debit: Sales returns
Credit: Allowance for sales returns
If a company anticipates that some of its not receivables will not be collectible, it should:
use an allowance account to value the note at net realizable value
If the previous year's estimate of bad debts expense was too low, and it was unintentional on management's part, how is this situation handled?
Bad debt expense in the subsequent year is increased.
Which accounting standards require more extensive disclosures related to accounts and notes receivables?
If a note receivable is impaired, it is measured at:
discounted present value of expected cash flows at the loan's effective rate
For most credit sales, revenue and the related expenses should be reported:
at the point of delivery
The accounting principle that would require recognition of bad debt expense to sales in the current period is the __________ principle.
Accounts receivable are classified as current assets because:
they will be converted to cash within 1 year of the normal operating cycle
What is the journal entry for receiving a repayment on an interest-bearing note from a customer?
Credit: Interest revenue
Credit: Note receivable