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Intermediate accounting 1 > CH 7 > Flashcards

CH 7 Flashcards

1
Q

What is the most liquid asset?

A

Cash is the most liquid asset, and the life blood of business.

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2
Q

Define Current Assets.

A

Assets that are expected to be converted to cash or consumed within 1 year as per Operating Cycle, is longer, as of the BS Date.

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3
Q

What is the order of the Current Assets?

A 
Assets on the BS are listed in order of liquidity.
BS Cash (the 1st Current Asset) matches Ending Cash, bottom line of the Statement of CFs.
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4
Q
  1. What is included in Cash vs. Cash Equivalents (CE)?
A

Cash: Readily available: petty cash, checks received, money orders, unrestricted bank accounts.

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5
Q

What is: restricted cash, a compensating balance, a bank overdraft & how are they treated?

A

Restricted: If material amount of cash is not planned to be used within 1 year, it is long-term.

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6
Q

Can cash ever be a non-current asset?

A

Yes, CE:

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7
Q

Define restricted cash

A

If material amount of cash is not planned to be used within 1 year, it is long-term.

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8
Q

Define compensating balance

A

Minimum cash balance required to be kept based on a loan agreement.

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9
Q

Define bank overdraft

A

A bank overdraft is writing a bad check: non sufficient funds (an “NSF” check) to cover the check.

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10
Q

Define Petty Cash

A

Custodian keeps lockbox with minimal cash for expenses where checks are impractical. When petty cash needs replenishment, Custodian must present JE’s for cash used

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11
Q

Define Cash over and short account

A

For cashier immaterial mistakes; Add to Misc.Rev. or Exp. on Income Stmt.

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12
Q

What are classification of cash

A

a. cash
b. petty cash and change funds
c. short term paper
d. posdated checks and ious
e. travel advances
f. postage on hand ( as stamps or in postage meters)
g. Bank overdrafts
h. compensating balances

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13
Q

What is Cash

A

Classification: cash

If unrestricted report as cash

if restricted, identify and classify as current and noncurrent assets

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14
Q

What is Petty cash and change funds

A

classification: Cash

report as cash

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15
Q

What is short term paper

A

Classification: Temporary investments

Investments with maturity of less than 3 months. It is often combined with cash

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16
Q

What are postdated checks and i.o.u’s

A

Classification: receivables

Assume to be collected

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17
Q

What are travel advances?

A

Classification: receivables

Assume to be collected from employees or deducted from their salaries

18
Q

What are postage on hand?

A

Classification Prepaid expenses

may also be classified as office supplies inventory

19
Q

What are bank overdrafts

A

Classification Current liability

If right of offset exists, reduce cash

20
Q

What are Compensating balances

A

Classification : Cash separately classified as a deposit maintained as compensating balance

Classify as current or noncurrent in the balance sheet. Disclose separately in notes details of the arrangement

21
Q

What’s the problem with too little vs. too much cash?

A

Not enough cash to pay debts on time vs. too much cash generally provides a low rate of return.

22
Q

What reports help to manage cash?

A

Careful review of Statement of Cash Flows (past-Financial) & Cash Budget (future-Managerial).

23
Q

What are internal controls?

A

From internal control reports, these financial policies are to a. safeguard assets

b. promote efficiency
c. assure financial statements are reliable.

24
Q

What are some fundamental controls regarding cash?

A

a. Cash receipts should be deposited daily & cash payments,
b. if possible, should be made by check.
c. Cash (or any asset) should not be accessible to Accountants (or anyone with access to records), and
d. Treasurer (or anyone with access to cash or assets), should not have access to accounting records.

25
Q

What’s a subsidiary ledger?

A

Subsidiary ledgers are not needed for FS purposes, but for managerial purposes,( i.e., to manage a company)

AR lists customers & what each owes to collect; AP lists suppliers & what each is owed, etc.

Note: There is only one GL, with many GL accounts, resulting in many Subsidiary Ledgers.

26
Q

What is the month-end bank reconciliation

A

After Cash is reconciled, what JE adjustments are required to get to the correct month-end Cash.

a. A Co. prepared schedule to reconcile (agree to) the correct month-end Cash between what
b. Co. shows in its Cash GL to what the Bank shows on the month-end Bank Statement.
c. The Co. side of the Reconciliation adjusts (& prepares JE’s) for items learned on the Bank Stmt,
d. While the Bank side adjusts for items the Bank does not yet know when the Bank Stmt was prepared.
e. The Co. JE must include all Co. side adjustments (not Bank side adjustments) to correct Cash

27
Q

What type of adjustments generally reconcile bank cash to correct cash?

A

Adjustments on the “Balance per Bank” side of the Reconciliation:
+Deposits in Transit: Co. deposited, recorded & posted (Books) but not yet shown on Bank Stmt.
– Outstanding Check: Check written by Co. & posted (Books) but not yet shown on Bank Stmt.
+ Bank errors: Should be rare event, but if Bank errs, Adj is needed to reconcile to correct cash.

28
Q

What type of adjustments generally reconcile GL Cash?

A

Adjustments on the “Balance per Books”(GL Cash) side of the Reconciliation:
+ Cr Memoranda: any interest earned & any unrecorded deposits customers paid Bank for Co.
– Dr Memoranda: bank fees, service charges & NSF customer checks (non sufficient funds).
+ Co. errors to Cash acct: Should also be a relatively rare event, but if Co. errs, Adj is needed

29
Q

What are differences between trade receivables and non-trade receivables?

A

a. Trade receivables means AR (from customers)
b. Non-Trade are from others, not customers.

AR are generally less formal current assets, due in 30-60 days, without interest.
NR are generally based on formal, signed promissory notes with interest, current or long-term assets.

30
Q

What type of account are trade & cash discounts? What is the difference between them?

A

a.Both are contra sales, created by managers to keep track of discounts given on normal sales price.
Trade discounts are given to groups or certain sales, such as to students, seniors, or for bulk sales.

b. Cash (aka Sales) discounts are given to motivate customers to make quicker cash payment, such as:
2% discount if cash is received within 10 days of sale, otherwise total is due in 30 days.

c. cash discounts, Co. may allow customers to use credit cards (VISA, etc) to accelerate cash,
or can sell AR, called factoring, to a finance company, both ways requiring Co. to pay fees.
Pledging or Assigning AR means using receivables as collateral to borrow cash.
Securitization means packing receivables for sale as investments

31
Q

What is net realizable value (NRV) of AR and how does it appear on BS?

A

NRV of AR = AR less Allowance for Doubtful Accts (ADA:, contra asset estimating bad debt)

The adjusting entry to estimate is always: Dr Bad Debt Expense (IS acct) & Cr ADA (BS acct).

32
Q

Explain 2 Methods for uncollectibles & their AJEs? Which isn’t GAAP & can it be used?

A

a. Allowance Method: pre-estimates (GAAP-matching) & adjusting entry is Dr BDE; Cr ADA
b. Direct Writeoff: waits until specific customer goes bad (not matching): Dr BDE; Cr AR
c. Non-GAAP method that can only be used if result is immaterial difference from GAAP method.

33
Q

Explain the 2 Approaches under the GAAP Method? W

A

1) % of Sales (aka IS approach) calculation = AJE amount, which also = the BDE on the IS.
Based on % of Sales (net or cr sales); a quicker, easier method, often used for Interim FS

2) % of Recs (aka BS or Aging) calculation = end ADA cr balance for GL & BS, not the BDE;
AJE & BDE is a “plug” needed in the ADA GL account to result in the end cr balance needed

34
Q

What is aging method?

A

ADA balance is based on AR ages in Subsidiary Ledger; higher % used for older debt.

35
Q

What is the BS valuation for Cash vs. AR vs. Inventory vs. Investments vs. PP&E?

A

a. Cash: Face Value or Fair Value (Market Value)
b. AR: Net Realizable Value, estimate of how much of Total AR will actually be collected.
c. Inventory: Lower Cost (HC) or Market (generally Replacement Cost)
d. Investments: For Trading or Available for Sale Investments:
e. Fair Value For Held-to-Maturity Investments: Amortized Cost, HC amortized to Maturity (Par) Value
f. PP&E: HC less AD (Historical Cost – Accumulated Depreciation)

36
Q

When does a Co. sell its AR, & what is it called vs.NR?

A

Factoring AR (Discounting NR): When cash flow is really poor & borrowing difficult; high fees.

37
Q

Explain recourse vs. non-recourse.

A

a. Recourse means Co. guarantees the Factor (buyer) will receive a certain amount or % of AR in the event of debtor fails to pay.
b. The transfer of accounts receivable in a nonrecourse transaction is an outright sale of the receivables both in form (transfer of title) and substance (transfer of control).

38
Q

What’s a zero-interest bearing (aka deep discount) note?

A

A note for which all interest is paid at maturity & included as part of the face amount.
Because interest is part of the face or maturity amount, the note is present valued (discounted), meaning the original loan amount is less than the maturity amount, which includes the interest.

39
Q

What’s implicit interest rate?

A

The implicit interest rate is the rate used to present value a “zero” interest bearing note.

40
Q

What are six presetation of receivables

A
  1. Segregate the different types of receivables that a company possesses, if material.
  2. Appropriately offset the valuation accounts against the proper receivable accounts.
  3. Determine that receivables classified in the current assets section will be converted into cash within the year or the operating cycle, whichever is longer.
  4. Disclose any loss contingencies that exist on the receivables.
  5. Disclose any receivables designated or pledged as collateral.
  6. Disclose the nature of credit risk inherent in the receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses, and the changes and reasons for those changes in the allowance for credit losses.

Intermediate accounting 1 (10 decks)

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