Chapter 8 Flashcards Preview

accounting > Chapter 8 > Flashcards

Flashcards in Chapter 8 Deck (42):
1

Receivables

Refers to amounts due from individuals and companies

Expected to be collected in cash

*one of most liquid assets

2

Accounts receivable

Amounts customers owe on account

Result from sale of goods and services

30-60 days

*Most significant type of claim held by a company

3

Notes receivable

Claims for which formaul instruments of credit are issued as evidence of the debt

exted 60-90 days or longer

4

Trade receivables

Notes and accounts receivable that result from sales transactions

5

Other receivables

Include nontrade receivables such as interest receivable, loans to company officers, advances to employees, and income taxes refundable

*not from operations

*classified and reported as seperate items

6

Issues with accounts receiveable

1. Recognizing accounts receivable

2. Valuing accounts receivable

Also, accelerated cash receipts from receivables

7

Bad Debts Expense

An expense account to record losses from extending credit

AKA "Uncollectible accounts expense"

8

Direct write-off method

A method of accounting for bad debts that involves charging receivable balances to Bad Debt Expense at the time receivables from a particular company are determined to be uncollectible

9

Allowance method

Involves estimating uncollectible accounts at the end of each period

Provides better matching of expenses with revenues

receievables at net realizable value

10

Cash (net) realizable value

The net amount a company expects to receive in cash from receivables

11

Material

Significant or important information to financial statement users

12

What type of account is Allowance for Doubtful Accounts

a contra account because they do not know which customers will pay

not closed at the end of fiscal year

13

Cash realizable value formula

Accounts receivable - Allowance for doubtful accounts

14

Who writes off accounts?

To maintain good internal control, companies should not authorize someone to write off accounts who also has daily responsibilities related to cash or receivables

15

Write-offs and recovery affect what?

Affects the balance sheet accounts

not the income statement

16

Percentage of receivables basis

Management establishes a percentage relationship between the amount of receivables and expected losses from uncollectible accounts

17

Aging the accounts receivable

Company prepares a schedule in which customer balances are classified by the length of time they have been unpaid

18

Amount of bad debts expense adjusting entry

The difference between the required balance and the existing balance in the allowance account

19

When allowance account has a debit balance prior to adjustment

Occurs because the debits to the allowance account from write-offs exceeding the beginning balance in the account which was based on previous estimates for bad debts

20

Promissory note

A written promise to pay a specified amount of money on demand or at a definite time

21

Maker: promissory note

The party making the promise to pay

22

Payee: promisory note

The party to whom payment is to be made

23

3 uses for promissory notes

When individuals and companies lend or borrow money

When amount of transaction and the credit period exceed normal limits

settlement of accounts receivable

24

Two key parties to a note and entries made

Maker - credits notes payable

Payee - debits notes receivable

25

Three issues in accounting for notes receivable

Recognizing notes receivable

Valuing notes receivable

Disposing of notes receivable

26

Maturity rate: in terms of days

Omit the date the note is issued but include the due date

27

Interest

$730 12% 120 days

730 x 12% x 120/360

28

Fair value: loans and receivables

FASB believes it would be a more accurate view

Banks believe it could cause large swings in a bank's reported net income

29

A note is honored

A note is honored when its maker pays in full at its maturity date

30

Amount due at maturity

The face value of the note plus interest for the length of time specified on the note

31

dishonored note

A note that is not paid in full at maturity

No longer negotiable

32

Five steps of managing accounts receivable

1. Determine to whom to extend credit

2. Establish a payment period

3. Monitor collections

4. Evaluate the liquidity of receivables

5. Accelerate cash receipts from receivables when necessary

33

Concentration of credit risk

A threat of nonpayment from a single large customer or class of customers that could adversely affect the financial health of the company

34

Net Credit Sales

Net sales - cash sales

35

Receivables turnover ratio

Net Credit Sales

Average Net Receivables

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

*asses the liquidity of receivables

36

Average accounts receivable

can be computed from the beginning and ending balances of the net receivables

*assuming seasonal factors are not significant

37

Average collection period

365

Receivables Turnover Ratio

*Measures the average amount of time that a receivable is outstanding

Should not exceed credit term period

38

Captive finance companies

Encourage sale of company's products by assuring financing to buyers

Owned by the company selling the product

*have responsibility for accounts receivable

39

Reasons for the sale of receivables

1. Size

2. Companies may sell receivables because they may be the only reasonable source of cash

3. Billing and collection are often time-consuming and costly

40

Factor

A finance company or bank that buys receivables from businesses for a fee and then collects the payments directly from the customers

41

Selling of receivables: GAAP

Easy to do under GAAP

difficult to achieve under IFRS

42