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Flashcards in Chapter 8 Deck (39):
1

Accounts Receivable

amounts customers owe on account
results from sale of goods and services
receive within 30-60 days
most significant type of claim

2

Notes receivable

written promises for amounts to be received
requires the collection of interest and extends for 60-90 days

3

Notes and accounts receivable that result form a sales transaction are called

TRADE receivables

4

other receivables

nontrade receivables
example: interest, loans to company officers, advances to employees, income tax refundable

5

Recognizing accounts receivable

record when perform service, the point of sale of merchandise.

6

Valuing accounts receivable

record on balance sheet as an asset
determining amount is difficult

7

Service organization

records a receivable when it performs service on account

8

Merchandiser

records accounts receivable at the point of sale of merchandise on account

9

Bad debt expense

seller records this as a loss when customer is unable to pay extended credit

10

Direct write off

When a company determines receivables from a particular company to be uncollectible it changes the loss to bad debt expense (debit expense credit receivables)
NO matching

11

Direct write off is not

acceptable in financial reporting

12

Allowance method

estimating uncollectible accounts at the end of each period- provides better matching of expenses with revenues on the income statement

13

recording allowance method

Debit Bad Debts Expense and credit Allowance for Doubtful Accounts

14

Allowances for doubtful accounts

contra asset account to accounts receivable debit allowance for doubtful accounts and credit accounts receivable

15

Do you close allowance for doubtful accounts at the end of the fiscal year

no

16

Promissory note

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

17

when to use promissory note

1. individuals and companies lend/borrow money
2. when amount transaction and credit exceed normal limits
3. in settlement of accounts receivable

18

Payee

whom payment is made to (note receivable)

19

maker

party making promise to pay (note payable)

20

Maturity date

(month or days)
1. on demand
2. stated date
3. at the end of the stated period of time

21

Computing interest

face value of note x annual interest rate x time in terms of one year = interest

22

face value

the value shown on the face of the note

23

Cash (net) realizable value

report short-term notes receivable

24

disposing of notes receivable

1. notes may be held at their maturity date
2. maker may default and payee must make an adjustment
3. holder speeds up conversion to cash by selling the note receivable

25

Honored

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

26

maturity value

face value + interest rate

27

Dishonored (defaulted) note

note that is not paid in full at maturity
is no longer negotiable

28

if credit policy is too tight

loose sales

29

if credit policy is too loose

sell to customer who will pay either very late or not at all

30

establishing payment period

companies should determine a required payment period and communicate that policy with customers
should be consistent with that of competitors

31

Accounts receivable turn over (equation)

net credit sales (net sales-cash sales) / average net accounts receivable (beginning + end receivable/2)

32

what does accounts receivable turn over measure

the number of times on average a company collects receivables during the period AND assesses the liquidity of receivables

33

average collection period

365/ accounts receivable turn over

34

what does average collection period measure

the average time receivable is outstanding
assesses effectiveness of credit and collection policies

35

what should average collection period never exceed

credit term period

36

Alternating cash receipts

1. size (don't want to hold large amount of receivable)
2. companies may sell receivables because that may be the only reasonable source of cash
3. billing and collection are often time consuming and costly

37

factor

finance company or bank that buys receivables from business for a fee and then collects the payments directly form the customer

38

credit card sales: 3 parities involved

1. credit card user
2. retailer
3. customer

39

Retailer considers credit card sales as

cash sale
no bad debt is recorded and in exchange retailer pays card issuer a fee of 2%-4% of price