Chapter 9 Flashcards
Bank Overdrafts definition:
When a company writes checks in amounts that exceed the balance in its bank account.
Compensating Balances definition:
Minimum cash balances that debtors are required to keep on deposit as support for existing debts.
Can companies combine legally restricted compensating balances with regular cash on the balance sheet?
No
Trade Discounts definition:
Reductions of the price whenever a company sells to a reseller in the same industry
Two approaches to recording sales discounts:
Most Likely Amount
Expected Value
Most Likely Amount Method definition:
Recording accounts receivable at the most likely amount of cash that will be collected from customers.
Writes offs don’t affect:
Balance Sheet or Income Statement
When does a Recovery Occur?
When a company receives payment on an account it had previously written off.
Three techniques for financing with accounts receivable
Pledged/Assigned AR
Factoring AR
Securitization
Pledging/Assigning AR definition:
When a company uses its receivables as collateral for a lending arrangement by pledging or assigning the receivables
Factoring AR definition:
Selling receivables to a third party at a discount
Securitization definition:
Bundling together and selling an interest in many separate receivables
What do customers with Accounts Payable do in most Factoring arrangments?
They pay the company that bought the AR directly
Factoring companies must do what to the amount of AR they are selling?
Discount it
3 conditions for when a factoring transaction counts as a sale:
- The receivables are isolated from the selling company
- The factor has the ability to pledge or exchange the receivables
- The selling company doesn’t maintain effective control over the receivables
