CH 5 Flashcards
What is account receivable?
a. Amount cash owed to a company from operation services.
b. a. Legal right to receive cash is valuable and represents an asset of the company.
What are credit sales( or sales on account)
a. Transfer products and services to a customer today while bearing the risk of collecting payment from that customer.
What is another way of identify a credit sale?
a. Customer is unlikely to pay a company for either products or services.
Can credit cards be used if credit limit goes beyond limits?
No
If customer is not reasonable, can a firm record it as revenue?
a. No, customer does not have credibility to pay because of their poor payment.
7) What are other receivables?
a. Non-trade receivables ( sources that originate from other accounts that are not customers)
b. Tax refund
c. Interest receivable
d. Loans ( by company to other entities-stockholders)
e. Notes receivable ( debt instruments)
How do discounts benefit in the short term?
a. They cannot
i. It can reduce revenue in short run
What is net revenues?
a. Company’s total revenues less than amounts due to discounts
What are trade discounts?
a. Reduction in the listed price of a product or services.
b. Trade discounts are indirectly recorded
What is sales discount?
Represents a reduction not in the selling price of a product or service.
What are discount terms?
2/10, n/30
i. 2/10 = 2% if the amount is paid within 10 days.
ii. n/30= no discount, payment is due within 30 days
Is a sales discount a contra revenue account?
is an account balance that is opposite to revenue
What is a partial income statement?
list of uncollected accounts receivable and bad debt expenses.
What is a sales return?
A customer returns a product, so the company
- Reduce the customer’s account balance if on account
- Company issues a cash refund if purchased in cash.
What is sales allowance?
a. When a company’s product and services have a deficiency, the seller reduces balanced owed or provides a partial refund.
Is a sales allowance a contra revenue account?
Yes
Does a company have a recurring problem with customer satisfaction?
a. Provide sales returns and allowances
What are the positive effects of extending credit to customers?
Boost sales by allowing customers the ability to purchases on account and pay cash later.
What is negative effects of extending credit?
a. Not all customers will pay fully on their accounts.
What is an noncollectable accounts?
a. Customer’s accounts are not collectible
b. Bad debts another name for noncollectable accounts.
What is allowance method?
a. Allowing for the possibility that some accounts will be uncollected at some point in the future.
IS this statement true: “ Companies are required to estimate future collectible accounts and record those estimates in the current year”.
true
What are the effects of uncolletable accounts?
reduce accounts receivable
bad debt expenses
If a customer isn’t expected to pay, a company records as a loss?
true
How do you determine uncollectiveble accounts?
based on the percentage of accounts ( percentage of receivables method)
What is another name of percentage of receivables method?
balance sheet method
What is balance sheet method?
i. Estimation of bad debts on a balance sheet amount.
What is net realizable value?
a. In accounts receivable, a firm should report the amount that expects to collect.
What is bad debt expense?
represents the cost the estimated future bad debts
How do you adjust for estimates of future uncollected account?
a. Record a partial income statement
i. During period, match bad debts with credit sales.
Is allowance for uncollectable accounts a contra asset?
Yes
What is net accounts receivable?
a. Difference between total accounts receivable and allowance for uncollectible accounts
When are company’s credit sales polices too lenient?
use partial income statement
How do you journalize your allowance of uncollected accounts?
a. (Dr)Allowance of uncollected accounts
b. (Cr) accounts receivable
c. ( reported uncollected account from bad debtor)
How do you journalize estimation of bad debts?
a. (Dr) bad debt expense
b. (Cr) allowance for uncollective accounts
c. (estimate future bad debts
Is this a true statement: “Collecting cash on an account previously written off has no effect on total assets and no effect on net income?”
true
Are uncollective estimates correct most of the time?
a. No, “ it’s highly unlikely they will prove exactly correct”.
What is the aging method?
a. Using a higher percentage for old accounts than for new accounts when estimating collectible accounts.
Are old account much more likely to be collected?
a. No, they are less likely.
What is direct write off method?
a. Recording bad debt expense at the time we know the account is uncollectible.
Why doesn’t direct write off work in financial reporting?
a. There is no probability that cash will be collected.
b. There would be no adjustments if accounts are received by payer
Is this a true statement, “The direct write off method is used for tax purposes but is generally not permitted for financial and operation reporting”.
a. False, only financial NOT operative activities
What is notes receivable?
a. A formal credit arrangements evidenced by a written debt instrument or note.
Are notes receivable a long term assets?
yes
Can account receivable be replaced with notes receivable?
a. Yes, it has no impact on accounting equation; it just reclassifying assets.
Can accounts payable be reclassified as note payable, vice versa?
a. Yes, it does not impact the equation.
How do you journalize interest revenue when you cash in a note?
a. (dr) cash
b. (cr) note receivable
c. ( cr) Interest revenue
What is receivable turnover ratio?
a. Number of times during a year that the average accounts receivable balance is collected (turned over). It equals net credit sales divided by average accounts receivable.
What is average collection period?
a. Approximate number of days the average account receivable balance is outstanding. It equals 365 divided by the receivables turnover ratio.
Is the company effectively managing its receivables?
a. Receivables turnover ratio and average collection period.
Is this a true statement: Receivables turnoever ratio and average collection period can provide an indication of management’s ability to collect cash from customers.
true
