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Financial Acc Systems 1 > Ch 7 > Flashcards

Ch 7 Flashcards

0
Q

Post dated checks and I.O.U.s are treated as?

A

Receivables

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1
Q

Cash

A

Most liquid of assets

Standard medium of exchange and basis for measuring
And accounting for all other items

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2
Q

Travel advances are treated as?

A

Receivables, if collected from employees or deducted
from salaries

Or as prepaid expense

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3
Q

Postage stamps on hand are treated as?

A

Offices supplies inventory or prepaid expense

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4
Q

Petty cash funds and changes funds are accounted as?

A

Cash in current assets

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5
Q

Cash equivalents

A

Highly liquid short term investments readily convertible to cash

Mature within 3 months

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6
Q

Restricted cash

A

Classified as either current assets or Longterm assets

depending on date of availability or disbursement

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7
Q

Compensating balances

A

Minimum balances in checking or savings accounts

Constitutes support for existing borrowing arrangements
Of corporation with lending institution

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8
Q

What does the SEC recommend to avoid misleading investors about amount of cash available to meet current obligations?

A

Companies state separately legally restricted deposits
Held as compensating balances against short term
Borrowing arrangements

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9
Q

Companies should classify separately restricted deposits
Held as compensating balances against long term borrowing
Arrangements as… What should the caption read?

A

Non current assets in either investments or other assets
sections

“cash on deposit maintained as compensating balance”

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10
Q

Bank overdrafts, define, how should it be accounted for?

A

Occur when company writes a check for more than amount
In its cash account

Reported in current liabilities section adding to amount in accounts payable

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11
Q

Receivables

A

Claims held against customers and others for money,

Goods or services

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12
Q

Current, non current

A

Short term

Long term

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13
Q

Trade receivables

A

Most significant item company possesses

Usually accounts receivable and notes receivable

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14
Q

Accounts receivable

A

Oral promises of purchaser to pay for goods and
services sold

Open accounts resulting from short term extensions
Of credit normally 30 to 60 days

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15
Q

Notes receivable

A

Written promises to pay a certain sum of money

On a specified future date

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16
Q

6 examples of non trade receivables?

A

1 advances to officers and employees
2 advances to subsidiaries
3 deposits paid to cover potential damages or losses
4 deposits paid to guarantee performance or payment
5 dividends and interest receivable
6 claims against

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17
Q

6 examples of claims against in nontrade receivables?

A

1 insurance companies for casualties sustained
2 defendants under suit
3 government bodies for tax refunds
4 common carriers for damage or lost goods
5 creditors for returned, damaged or lost goods
6 customers for returnable items

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18
Q

3 Basic issues in accounting for accounts and notes receivable?

A

Recognition, valuation, disposition?

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19
Q

Recognition of accounts receivable: exchange price

A

Amount due from debtor

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20
Q

Why are Trade discounts used?

A

Avoid frequent changes in catalogs,

alter prices for different quantities purchased,

Hide true invoice price from competitors

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21
Q

Cash discounts (sales discounts), example?

A

Offered to induce prompt payment

Ex. 2/10, n/30; 2% if paid in 10 days, gross amount due 30 days

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22
Q

Net realizable value

A

Net amount expected to receive in cash

Companies value and report short term receivables
At net realizable value

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23
Q

Direct write of method

A

When company determines a particular account to be uncollectible, it charges loss to Bad Debt Expense

Shows only actual losses from uncollectibles

Bad debt expense. 8,000
Accounts receivable. 8000

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24
Q

Benefits of direct write-off method Of uncollectible accounts?

A

Tax purposes: showing actual losses, simple and convenient

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25
Q

Disadvantages of direct write-off method of uncollectible accounts? When is it appropriate to use?

A

Fails to record expenses in same period as
associated revenues

receivables aren’t stated at net realizable value on
balance sheet

Only appropriate when amount uncollectible is immaterial

26
Q

Allowance method of accounting for bad debts?

A

Estimating uncollectible accounts at end of each period

Ensures that companies state receivables on balance
sheet at net realizable value

27
Q

Net realizable value

A

Net amount company expects to receive in cash

28
Q

3 essential features of the allowance method for financial reporting purposes?

A

1 companies estimate uncollectible A/R, match
estimate expense against revenues recorded in period

2 companies debit estimated uncollectibles to Bad Debt
Expense and credit them to Allowance of Doubtful Accounts
Through adjusting entry at end of each period

3 when companies write off specific account, they debit
actual uncollectibles to Allowance for Doubtful Accounts
And credit amount to accounts receivable

29
Q

Closing entry: Allowance for Doubtful Accounts?

A

Companies do not close the Allowance for Doubtful

Accounts at the end of the fiscal year

30
Q

Bases used to estimate the allowance method? What do they emphasize?

A 
1) percentage of sales approach, emphasis on income 
statement Relationships (bad debt expense)

2) percentage of receivables approach, emphasis on balance sheet Relationships (allowance for doubtful accounts)

31
Q

Composite rate

A

Reflects estimate of uncollectible receivables under

Percentage receivables approach

32
Q

Aging schedule of accounts receivable

A

Applies different percentage based on past experience to

Different age categories

33
Q

Promissory note

A

Written promise to pay certain sum of money at specific

Future date

34
Q

Maker

A

Signs negotiable instrument (promissory note) in

Favor of designated payee

35
Q

Payee

A

May legally and readily sell or transfer (promissory)

note to others

36
Q

Interest Bearing notes

A

Have stated rate of interest

37
Q

Zero-interest bearing notes

A

Include interest as part Of their face value

38
Q

3 basic issues for accounting for notes receivable?

A

Recognition, valuation and disposition

Same as for accounts receivable

39
Q

Recognition of Notes Receivable: Companies should record and report Longterm notes receivable at…

A

Present value of cash they expect to collect

40
Q

Implicit interest rate

A

Computing interest rate from knowing future amount and

Present value of note

41
Q

Effective interest method?

A

Amortizing the discount on zero interest bearing notes

And recognizing interest revenue annually

42
Q

Discount on interest bearing note

A

Effective interest rate exceeds stated interest rate

And present value of note is less than face value

43
Q

When a note is received in exchange for property, goods or services in a bargain transaction, the interest rate is presumed to be fair unless 3 things?

A

1 no interest rate is stated

2 stated interest ate is unreasonable or
3 face amount of note is materially different from
Current cash sales price for same or similar items
From current value of debt instrument

44
Q

Imputation? what is the name for the resulting interest rate?

A

Estimation of present value of note by approximating
Interest rate that may differ from stated interest rate

Resulting interest rate is called imputed interest rate

45
Q

Valuing short term notes receivable and recording bad debt expense?

A

Exactly parallel to trade accounts receivable

Companies estimate amount of uncollectibles by using
Percentage of sales revenue or analysis of receivables

46
Q

Fair value option

A

Receivables are recorded at fair value, with unrealized

Holding gains or losses reported as part of net income

47
Q

Unrealized holding gain or loss

A

Net change in fair value of receivable from one period to

Another, exclusive of interest revenue

48
Q

Unrealized holding gain

A

Difference between fair value and carrying amount

49
Q

Any change in value in subsequent periods?

A

Report unrealized holding gain or loss

50
Q

How can an owner accelerate the receipt of cash from receivables?

A

By transferring accounts or notes receivables to

another company for cash

51
Q

Why might a holder sell receivables?

A

Money is tight and access to normal credit is unavailable

Or too expensive

52
Q

Why might a purchaser buy receivables?

A

To obtain legal protection of ownership rights afforded to purchaser of assets versus lesser rights afforded to
A secured creditor

53
Q

2 ways transfer of receivables to a third party for cash happens?

A

1 secured borrowing

2 sales of receivables

54
Q

Secured borrowing

A

Company uses receivables as collateral in borrowing

transaction

55
Q

Sales of receivables: Factors

A

Factors are finance companies or banks that buy
receivables from businesses for a fee

and collect remittances directly from customers

56
Q

Sales of receivables: Securitization

A

Takes a pool of assets, such as credit card receivables,
Mortgage receivables or car loan receivables,

and
Sells shares in these pools of interest and principal payments

57
Q

Buying receivables without recourse

A

Purchaser assumes risk of collectivity and absorbs any

Credit losses

58
Q

Receivables sold with recourse

A

Seller guarantees payment to purchaser in event debtor fails

To pay

59
Q

Financial components approach in receivables sold with recourse?

A

Values assigned to components of:
Recourse provision
Servicing rights
Agreement to reacquire

60
Q

3 conditions for a sale of receivables to occur?

A

1 sale of assets isolated from transfer or

2 transferee has right to pledge or sell assets

3 transfer or does not maintain control through repurchase
Agreement

61
Q

6 general rules for classifying receivables?

A

1 segregate different types of receivables company
possesses
2 appropriately offset valuation accounts against proper receivables accounts
3 determine receivables in current assets section
Will be converted to cash within 1 year
4 disclose any loss contingencies that exist on receivables
5 disclose any receivables designated or pledged as collateral
6 disclose nature of credit risk in receivables, how risk is
Analyzed, assessed in arriving at allowance for credit losses

62
Q

Accounts receivable turnover ratio, purpose, equation?

A

Assess liquidity of receivables

Number of times on average company collects receivables
During period

Accounts receivable turnover =
net sales/avg. (net) trade receivables

63
Q

Days to collect accounts receivable or days outstanding

A

Days to collect accounts receivable =

365/accounts receivable turnover

Financial Acc Systems 1 (22 decks)

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