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Flashcards in Receivables & inventory Deck (70)
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1

What is an accounts receivable?

an account receivable is usually related to the sale of goods to customers or the provision of services to customers

2

What is a notes receivable?

Often related to non-customer transactions although many larger consumer items and transactions between businesses require a promissory note

3

What are the 4 types of receivables?

Accounts Receivable, Notes Receivable, Trade Receivable, Non-trade Receivables

4

What is a trade receivable?

another name for customer accounts receivable

5

What is a non-trade receivable?

Those receivables created in non-customer transactions

6

What items adjust the accounts receivable balance?

1. trade (quantity) discounts;
2. cash (sales) discounts;
3. sales returns and allowances;
4. non-collectible accounts.

7

What are the two methods of accounting for receivables?

The gross method (before discount) and the net method (after discount)

8

what is sales discounts forfeited?

a miscellaneous revenue account used in the net method to separately record discounts not taken.

9

What is bad debt expense?

the account that records the effect of uncollectible accounts. Bad debt expense is on the income statement. The allowance for uncollectible accounts is a balance sheet account contra to accounts receivable

10

What are the two methods to account for bad debt expense?

The direct write off method and the allowance method

11

How does the Direct Write off Method work for bad debt expense?

This method records bad debt expense only when a specific account receivable is considered uncollectible and is written off

Negative Aspects - AR is overvalued, bad debt expense is recognized a year after it is earned, Not in accordance with GAAP

Positive Aspects - not materially different, simple and practical to use

12

How does the Allowance Method work for bad debt write off?

Required under GAAP of uncollectible accounts are probable and estimable.

positive aspects - recognize rev and expenses in the same year

13

How does the entry to write off uncollectible accounts affect income or net assets?

it has no effect since it has already been recognized.

14

How does the income statement approach work for estimating bad debt?

Under this approach a company may estimate bad debt expense as a percentage of credit sales

Remember that if you use the income statement approach, you are calculating an income statement number (bad debt expense).

15

In the income statement approach of estimating bad debt, does the existing balance effect the amount?

No

16

What are the two methods for estimating bad debt?

Income Statement approach and Balance Sheet approach

17

How does the Balance Sheet approach work for estimating bad debt?

the company estimates bad debt expense by analyzing the ending accounts receivable.

Remember that if you use the balance sheet approach, you are calculating a balance sheet number (allowance for doubtful accounts).

18

In the Balance Sheet approach of estimating bad debt, does the existing balance effect the amount?

The analysis of ending accounts receivable has one simple objective: the determination of the needed or desired balance in the allowance account

Once the needed balance in the allowance account has been determined, the needed balance is compared to the existing balance in the allowance account. The difference in these two balances is the amount of bad debt expense to be recorded for the accounting period.

19

Who is the maker of a note?

The buyer or borrower (This party is making an unconditional promise to pay principal and interest over the note term)

20

Who is the holder of a note?

The holder of the note (seller or lender) is the creditor and is the firm recording the note receivable on its books.

21

How are notes recorded?

at Present Value unless its less than a year term

22

How do you determine the present value of a cash transaction?

the present value of future cash flows will equal the amount of cash that exchanged hands on the date of note creation.

23

How do you determine the present value of a non-cash transaction?

the transaction will be recorded at the fair market value of the non-cash asset or the fair market value of the note receivable (present value of future cash flows), whichever one can be more clearly determined.

24

Who is the maker when refering to the sale of receivables?

the debtor that has borrowed funds or purchased an asset and provided a note to the original creditor

25

Who is the original creditor when refering to the sale of receivables?

the firm that has loaned funds or sold an asset to the maker.

26

Who is the transferee/3rd party when refering to the sale of receivables?

provides the funds to the original creditor

27

What criteria is required to determine if a transfer of receivables is considered a sale?

The transferred assets have been isolated from the transferor, even in bankruptcy.
The transferee is free to pledge or exchange the assets.
The transferor does not maintain effective control over the transferred assets either through an agreement that allows and requires the transferor to repurchase the assets or one that requires the transferor to return specific assets.

28

What does it mean when a transaction is completed with recourse?

the transferor is responsible for nonpayment on the part of the original maker of the receivable. This means that if the maker (original debtor) defaults, the original creditor must assume all the payments on the receivable

29

What does it mean when a transaction is completed without recourse?

the transferor is not responsible for nonpayment on the part of the maker of the receivable. Typically, nonrecourse transfers are accounted for as sales because control has passed to the transferee

30

What does it mean when a transaction is completed on notification basis?

the maker of the receivable is informed of the transaction and typically is instructed to make payments to the third party