Lecture 7 - Cash And Receivables Flashcards
(35 cards)
Trade receivables
Accounts receivable
Notes receivable
Non trade receivables
Advances to employees, receivables from government, dividends/interest payable, amounts owing from insurance
Trade discounts
Often for different quantities purchased, generally not recorded
Cash (sales) discounts
Are recorded, 2/10 n/30
Two methods to record cash discounts
- Gross method
2. Net method
Gross method
Record full amount at time of sale, if discount is used reduce revenue
“Sales discounts” deducted from sales on income statement
Net method
Record A/R net of the discount
“Sales discount forfeited” is recorded as “other revenue” if customer doesn’t take the discount
Impairment of A/R
Short term receivables are escorted at NRV
NRV = A/R - estimated uncollectibles/returns/allowances/cash discounts
Impaired if significant change in expected cash flow
2 ways to estimate uncollectible receivables
Direct write off method
Allowance method
Direct write off method
Only appropriate if the amount is immaterial
Accounts are written off when they are determined uncollectible
May overstate NRV of A/R
Allowance method
Must use if amount is material
Estimated uncollectible is matched against A/R
A/R reported at A/R - AFDA
Direct write off journal entry
Debit bad debt expense
Credit A/R
Allowance method journal entry
Debit AFDA
credit A/R
Journal entry to create AFDA and bad debts expense
Debit bad debts expense
Credit AFDA
Interest bearing short term notes receivable
Has stated rate of interest
Zero interest bearing short term notes receivable
Interest amount is the difference between the borrowed amount and the face amount
Face value of notes receivable
Amount paid/received at maturity
Carrying value of notes receivable
Value in the books
2 interest rates for notes receivable
Stated rate
Effective (market rate)
Stated rate
Use too calculate cash paid, contracted amount the bond holder will receive as interest payments
Effective (market) rate
Based on borrowers credit riskiness
Use to calculate PV and interest revenue
Time value of money
Simple vs compound interest rate
Present value vs future value
Single amount vs annuity (due or ordinary) (due you get paid at beginning of each year)
Long term notes receivable are recognized at
Fair value = PV of future cash flows
Stated rate = market rate
Face value
