Cash & Receivables Flashcards
What are some examples of current assets?
Negotiable paper
Money market funds
Passbook savings accounts
Deposits held as compensating balances against borrowings which are not legally restricted
Time certificates of deposit with original maturities of three months or less
What are exclusions from current assets?
Time certificates of deposit (CDs) with original maturities longer than three months
Legally restricted deposits held as compensating balances
Restricted cash (classified as current or noncurrent based on what it’s restricted for, segregated from unrestricted cash either way)
Overdrafts (NOT negative cash amounts, but current liabilities)
Certain deposits (restricted)
Postdated checks
IOUs
Postage
What is the reason for periodic bank reconciliation?
Differences arise from items in books but not bank statements (or vice versa)
Errors
Certified and cashier’s checks
In a bank reconciliation, how do you get from the bank amount to the true amount?
Add deposits on hand (with company)
Add cash on hand
Subtract outstanding checks
In a bank reconciliation, how do you get from the book amount to the true amount?
Add/subtract for transactions with bank not yet recorded
Subtract bank fees
Subtract returned NSF checks
What are the journal entries for bank reconciliation?
Only JEs from adjustments to book balance
JE for transactions with bank not yet recorded (varies)
Debit: Bank Fee
Credit: Cash
Debit: Special Receivable - NSF Check
Credit: Cash
What are accounts receivable?
Claims arising from ordinary sales operations
Other claims should be reported separately
How should accounts receivable be reported?
Net Realizable Value (net amount expected to be received in cash)
How should discounts on A/Rs for prompt payment be recorded?
Record A/Rs net of discounts for prompt payment
If payment not prompt, record difference as interest revenue
If A/Rs recorded at gross, anticipate and deduct discounts at year-end
How should trade and quantity discounts on A/Rs be recorded?
Record the actual consideration agreed upon
Apply multiple discounts successively, not cumulatively
How should sales returns and allowances for A/Rs be recorded?
Future returns and allowances for outstanding A/Rs should be anticipated and recorded at the balance sheet date
Credit a separate allowance account for estimated amount
How are freight charges for A/Rs recorded?
If freight is borne by seller, charged to expense account
If freight is borne by buyer, charge included in receivable
What is the percentage-of-sales method for estimating uncollectible receivables?
Bad Debt Expense = % of Sales for the period
Previous year’s BDE not considered - this method is income-statement-oriented
Yet, amount charged to BDE should still be added to existing balance of Allowance for Uncollectible Receivables
What is the percentage-of-outstanding-receivables method for estimating uncollectible receivables?
Total Bad Debt Expense = % of ending balance of gross A/Rs
Amount of BDE recognized is difference between existing balance and desired balance - this method is balance-sheet-oriented
Method can also involve “aging,” where different percentages are applied to differently aged A/Rs
How do bad debt expense and accounts written off affect net income?
Recording BDE decreases net income, net A/Rs, current assets
Recording accounts written off has no effect
Reinstating bad A/Rs also have no effect, since they still predict uncollectibility from other A/Rs
What JEs record bad debt expense and allowances for uncollectible receivables?
Debit: Bad Debt Expense
Credit: Allowance for Uncollectible Accounts (contra account to A/R)
As A/Rs are identified and written off…
Debit: Allowance for Uncollectible Accounts
Credit: A/R - John Doe
What JEs record subsequent collections on written-off A/Rs?
Debit: A/R - John Doe
Credit: Allowance for Uncollectible Accounts
Debit: Cash
Credit: A/R - John Doe
Why is the direct write-off method prohibited?
Does not match cost of sale with revenues
Can sales for goods on consignment be included in A/Rs?
Not if the consignee has not yet sold them
Instead, they must be included in consignor’s inventory at cost, not in consignor’s A/R
What is the Uncollectible Accounts Expense?
The same as Bad Debt Expense
What are notes receivable?
Claims not arising from ordinary business sales
Usually result from:
- sale of property
- special arrangements for overdue A/Rs
- loans to stockholders, employees, and affiliates
What is the difference between interest-bearing and noninterest-bearing notes receivable?
In noninterest-bearing notes receivable, the interest is included in the face amount, not an addition to it
How are notes receivable valuated?
Usually at present value, discounted at market rate
If exchanged for cash, note’s PV is assumed to equal cash proceeds
Noninterest-bearing N/R and N/Rs with unrealistic interest rates are reported at either PV or FV of goods or services exchanged. Resultant discount or premium should be amortized with effective interest method.
How are loan origination fees relevant to notes receivable?
Should be deferred and amortized (with interest method) over the life of the loan as an adjustment to interest income
How can an impaired loan be measured?
Present Value method - PV of future cash flows, net of discounted disposal costs, discounted at effective interest rate
Market Price method - loan’s observable market price
Fair Value of Collateral method - self-explanatory; this method should be used if foreclosure is likely
What is the difference between an annuity due and an ordinary annuity?
Annuity due - paid at beginning of period
Ordinary annuity - paid at end of period
How is a note receivable valuated if made under customary trade terms and receivable within one year?
Generally the same as an A/R - not discounted, but recorded at face value
What are four ways to convert receivables to cash?
- Discounting
- Assignment
- Factoring
- Pledging
Accounted for as sale if holder surrenders control of receivable; otherwise accounted for as secured borrowing with collateral
What is discounting?
Selling a N/R to a third party (usually a bank) at a discount
Often done “with recourse” = seller is liable for note if debtor defaults - seller must disclose this as contingent liability (either footnote or contra-asset account to N/R)
To discount, seller must first calculate (1) interest accrued prior to discounting and (2) proceeds to be received from discounting
How do you calculate the proceeds from a discounted note receivable?
Face Amount \+ Interest at Maturity (not discounted) = Maturity Value - Discount (Maturity Value x Discount Rate x Remainder of Time) = Proceeds
What is the “Notes Receivable Discounted” account?
It represents N/Rs that are still held with recourse (a contingent liability)
Contra-asset account which equals the face value of the N/R (NOT the discount proceeds)
What is assignment?
The rights to A/R are given to a financial institution in exchange for cash
Transfers A/R to special account, “Accounts Receivable Assigned”
-Cash received from institution recorded as a liability
Usually includes “with recourse” and “non-notification” clauses
What does the non-notification clause mean?
The debtor is not notified of the assignment of A/Rs
Debtor payments forwarded from assignor to assignee
What is factoring?
Selling A/R to the factor
Generally without recourse, factor generally handles billing and collection from debtor
What is pledging?
Offering A/Rs as security for loans
Pledged A/Rs must be disclosed
If an A/R is sold with recourse, should it be kept on the books?
Usually, yes
If (1) A/Rs are isolated from transferor,
(2) transferee is free to pledge/exchange A/Rs, and
(3) there is no repurchase agreement,
then remove from books
Primary issue is CONTROL
If a receivable is to be paid in equal installments (part principal and part interest) over a series of periods, how do you calculate what the amount will be?
(Face amount of receivable) / (PV factor of ordinary annuity for n periods at stated rate) = Periodic Payment
Are notes receivable recorded with their interest revenues included?
NO
Only noninterest-bearing notes will automatically have interest amounts included. All other notes have separate interest receivable (and interest revenue) accounts.
