AC 224 (chapter 8) Flashcards
What are Receivables?
Claims (for cash) held against customers and other parties for money, goods, or services provided.
How are Receivables categorized?
- Current: expected to be received within one year.
- Noncurrent: not expected to be received within one year.
What are Trade Receivables?
Related to goods sold or services provided to customers.
What are Accounts Receivable?
Oral promises to pay for goods and services; short-term extensions of credit.
What are Notes Receivable?
Written promises to pay a sum of money on a specified date; can arise from sales, financing, or other transactions.
What are Non-trade Receivables?
Related to transactions outside the normal course of business, e.g., advances to employees, deposits paid.
When is Accounts Receivable recognized?
When a performance obligation is satisfied.
What are key indicators that a performance obligation is satisfied?
- Company has the right to payment from the customer.
- Legal title has passed to the customer.
- Physical possession of the goods has passed to the customer.
- Company no longer has significant risks and rewards of ownership of the goods.
- Customer has accepted the goods.
What is the journal entry when the sale is completed?
Dr. Accounts Receivable, Cr. Sales Revenue
What is the Direct Write-Off Method?
Records bad debt expense when the account is determined to be uncollectible; not allowed under GAAP.
What is the Allowance Method?
Estimates the amount of receivables expected to be uncollectible and records bad debt expense when the receivable is earned.
What is the entry to estimate bad debt expense in the Allowance Method?
Dr. Bad Debt Expense, Cr. Allowance for Doubtful Accounts
What does the Balance Sheet Presentation of Accounts Receivable include?
- Accounts Receivable
- Less: Allowance for Doubtful Accounts
- Accounts Receivable, net
What is the Accounts Receivable Turnover?
Measures the number of times, on average, a company collects receivables during the period.
What formula is used to calculate Accounts Receivable Turnover?
Accounts Receivable Turnover = Net Credit Sales / Average Net Accounts Receivable
What is the Average Collection Period?
Measures the number of days between creation and collection of an account receivable.
What is the Maturity Date in Notes Receivable?
The date on which the payee must pay the amount due.
How is interest computed for Notes Receivable?
Interest = Face Value of Note × Annual Interest Rate × Time (in terms of one year)
What should a company do if it expects not to collect a portion of its outstanding Notes Receivable?
Recognize an Allowance for Doubtful Accounts.
What is the entry to record accrued interest revenue?
Dr. Cash/Interest Receivable, Cr. Interest Revenue
What must a company disclose regarding its receivables?
Major types of receivables, gross amount, applicable allowance amount, and net amount.
What is the purpose of estimating the allowance for bad debts?
To match expenses with their associated revenues and forecast future collectability.
True or False: The Direct Write-Off Method matches expenses with associated revenues.
False
Fill in the blank: Accounts Receivable are reported at the _______.
Net amount expected to be collected.
