6. Receivables Flashcards
account receivable
An amount owed by a customer who has purchased the company’s product or service.
_____________ is a contra-revenue account, meaning that its balance is subtracted from Sales when calculating a company’s net sales.
Sales Returns and Allowances is a contra-revenue account, meaning that its balance is subtracted from Sales when calculating a company’s net sales.
Like Sales Returns and Allowances, the __________ account is a contra-revenue account that is subtracted from sales when calculating net sales.
Like Sales Returns and Allowances, the Sales Discounts account is a contra-revenue account that is subtracted from sales when calculating net sales.
Some may treat sales discount as a ‘___________’ as it might be seen as a way of receiving cash earlier than would happen if there was no incentive for customers to pay quickly.
Some may treat sales discount as a ‘financial expense’ as it might be seen as a way of receiving cash earlier than would happen if there was no incentive for customers to pay quickly.
Because accounts receivables are expected to be collected within a month (or two), they are classified and reported as _____________.
Because accounts receivables are expected to be collected within a month (or two), they are classified and reported as current assets.
net realisable value
The amount of cash that a company expects to collect from its total accounts receivable.
bad debt expense
The expense resulting from the inability to collect all accounts receivable.
direct write-off method
Method in which bad debt expense is recorded when a company determines that a receivable is uncollectible and removes it from its records.
When an account is deemed uncollectible, it is written off and an _______ is recorded.
The major disadvantage is that it can violate the matching principle.
The matching principle requires that _______ be matched as closely as possible to the _______ in which the related _______ are recognised.
When an account is deemed uncollectible, it is written off and an expense is recorded.
The major disadvantage is that it can violate the matching principle.
The matching principle requires that expenses be matched as closely as possible to the period in which the related revenues are recognised.
allowance method
Method in which companies use two entries to account for bad debt expense –
(1) estimate the expense
(2) write off receivables
allowance for doubtful debts
The dollar amount of receivables that a company believes will ultimately be uncollectible.
percentage-of-sales approach
Method that estimates bad debt expense as a percentage of sales.
percentage-of-receivables approach
Method that estimates bad debt expense as a percentage of receivables.
ageing schedule
A listing of accounts receivable by their ages.
Vertical analysis divides each account balance by a base account, yielding a percentage.
The base account is total assets for _____________ and net sales or total revenues for _____________.
Vertical analysis divides each account balance by a base account, yielding a percentage.
The base account is total assets for financial position (balance sheet: assets = liabilities + equity) and net sales or total revenues for statement of income accounts.
Key Formula
receivables turnover ratio
Key Formula
days-in-receivables
Key Formula
allowance ratio
A ______ allowance ratio indicates that a company expects more receivables to be uncollectible.
A higher allowance ratio indicates that a company expects more receivables to be uncollectible.
