Ch. 7 Flashcards
Cash is
The most liquid
Is the standard medium of exchange and basis for measuring and accounting for all items
Cash consists of
Coin, currency and available funds on deposit at the bank
Negotiable instruments such as money orders, certified checks, cashiers checks, personal checks and bank drafts are viewed as
Cash
Temporary investments include
Money market funds
Money market savings certificates
Certificates of deposits
Similar types of deposits and short term paper
Companies treat postdated checks and I.O.U.’s as
Receivables
Travel advances are treated as receivables if
Collected from employees or deducted from their salaries , otherwise treated as prepaid expense
Petty cash funds and change funds are used to
Meet current operating expenses and liquidate current liabilities, companies include these funds in current assets as cash
Cash equivalents
Short term highly liquid investments that are
A) readily convertible to known as amounts of cash
B) near maturity that they present insignificant rod of changes in values because of changes in interest rates
Only investments with original maturities of theee month or less qualify under these conditions
Are cash equivalents always cash?
No
What are examples of cash set aside?
Petty cash, payroll and dividend funds
In most situations these are not material
Restricted cash
When material in amount companies segregate restricted cash from regular cash for reporting purposes
Restricted cash is classified as
Current assets
– if using cash for payment of existing or maturing obligations (within a year or operating cycle whichever is longer)
Or
Long term assets
– reported on the balance sheet if holding cash for a long period of time
Compensating balances
Minimum balances
As the portion of any demand deposit or time deposit or certificate of deposit maintained by a corporation which constitutes support for existing borrowing arrangements of the corporation with lending institution
Sec recommends companies to state separately legally restricted deposits held as compensating balances against short term vitrine arrangements among cash and cash equivalents items in current assets because
To avoid misleading investors about amount of cash available to meet recurring obligations
Bank overdraft
Occur when a company writes a check for more than the amount in it cash account
Bank overdrafts should be reported where?
Current liabilities section, adding them to amount reported as accounts payable
Receivables
Often referred to as loans and receivables
Claims held against customers and others for money, goods, or services
Companies classify receivables as either
Current (short term)
Noncurrent (long term)
Companies expect to collect current receivables
Within a year or during current operating cycle, whichever is longer
Other receivables are classified as noncurrent
Trade receivables
Customers often owe a company amounts for goods bought or services rendered
Accounts receivables
Oral fpromises of purchaser to pay for goods and services sold
Accounts receivables are represented as
Open accounts ,
Usually collected within 30-60 days
Notes receivables
Written promises to pay a certain sum of money on a specified future date
Non trade receivables examples
- Advances to officers and employees
- Advances to subsidiaries
- Deposits paid to cover potential damages or losses
- Deposits paid as a guarantee of payment or performance
5 dividends and interest receivable
- Claims against
Insurance companies cornxasualities sustained
Defendants under suit
Governmental bodies for tax refunds
Common carriers for damages or lost goods
Creditors for returned damaged or lost goods
Customers for returnable items
The concept of control is the deciding factor in determining when
Performance obligation is satisfied and an account receivable recognized
Transaction price
Mount of consideration that a company expects to receive from a customer in exchange for transferring goods or services
Trade discounts
To avoid frequent changes in date logs, alter prices for different quantities purchased or to hide true invoice price from competitors
Trade discounts are commonly quoted in
%
Cash discounts (sales discount)
Induces prompt payment
Companies should record accounts receivables and related revenue at the amount of
Consideration expected to be received from customer
Net method
Attempts to value receivables at its net realizebale values
Use gross method bc
Companies may not use net method for practicability reasons
Net method requires additional analysis and book keeping
Sales returns and allowances
Contra revenue account to sales revenues and offsets sales revenue on income statement
Allowance for sales returns and allowances is
Contra asset account to acct receivables and offsets accounts receivables on balance sheet
Time values of money
Ideally company should measure receivables in terms of present value that is discounted value of cash To be received in the future
Interest revenue
Is any revenue after the period of sale
Interest revenue is often ignored related to account receivables bc
It is not material in relation to net income for period
Two methods for uncollectible accounts
Direct write off method
Allowance method
Under direct write off method, bad debt expense will show
Direct method shows
Actual losses from uncollectibles
Determines a particular account to be uncollectible
Supporters of direct method say that it records
Facts not estimates
Direct method is deficient because
It fails to record expenses in same period as associated revenues
Nor
Does it result in receivables being stated at net realizable value on balance sheet
Direct write off method is not considered appropriate except
When the amount uncollectible is immaterial
Allowance method
Accounts for bad debts involves estimating uncollectible accounts at the end of each period
Allowance method ensures that companies state receivables on balance sheet at their
Net realizable values
Net realizable value
Is the net amount the company expects to receive in cash
Companies estimate uncollectible accounts and net realizable value using
Information about past and current events as well as forecasts of future collectibility
Companies use contra asset accounts because
They do not know which customers will not pay
Companies do not close allowance for doubtful accounts at the end of fiscal year
T or f
True
When should a company write off an account?
When companies have exhausted all means of collecting a past due account and collection appears impossible
When a write off occurs , bad debt expense does not
Increase
Under allowance method, companies debit write off account to
Allowance account rather than bad debt expense
Recovery of bad debt, like the write off bad debt affects only
Balance sheet accounts
Expected uncollectible accounts are estimated
Based on info on past events(loss experience), adjusted fro current conditions and reasonable forecasts of factors that would affect uncollectible accounts w
Percentage of receivables approach
Estimate % of outstanding receivables that will become uncollectible
Composite rate
Reflects an estimate of uncollectible receivables
Aging schedule
Of acct receivables which applies different % based on past experience to various age categories
Aging schedule is gl determine
Determine Bad debt expense
Prepare it as control device to determine composition of receivers and identify delinquent accounts
Note receivables supported by promissory note,
A written promise to pay a certain sum of money at a specific future date
Interest bearing notes have
Stated rate of interest
zero interest bearing notes
Include interest as part of face amount
Note receivables are considered
Fairly liquid even if long term bc companies may easily convert them to cash
Companies frequently accept notes receivables form customers who
Need to extend the payment period of an outstanding receivables
The basic issues in accounting notes receivable are same as those for account receivables
Recognition, valuation and disposition
Companies record and report long term notes receivable at
Present value of cash they expect to collect
If a company receives a zero interest bearing note, its
PV is the cash paid to issuer
Can compute interest rate when you know both
FV and PV
Interest bearing notes
Stated and effective rate differ
True
When a note is received in exchange for propert, goods or services in a bargained transaction, the state interest rate is fair unless
No interest rate is stated
Or
The stated interest rate is unreasonable
Or
Face amount of note is materially different from current cash sales price for same or similar items or from current FV of debt instrument
Imputed interest rate
Resulting interest rate
Imputation
Process of interest rate approximation
Short term notes receivables are reported at
Net realizable value
Fair value option
The option to us FV as basis of measurement in financial statements
FV is more relevant than historical cost bc
It reflects current cash equivalent value of financial instruments
If fair value option is chosen
The receivables are record at FV, with unrealized holding gains or losses reported as part of net income
Unrealized holding gain or loss
Net change in FV of receivables from one period to another, exclusive of interest revenue
Any change in fair value is reported as
Unrealized holding gain or loss
In order to accelerate the crops of cash from receivables,
The owner may transfer accounts or notes receivables to another company for cash
Reasons for transferring accounts
- Competitive reasons
- Holder may sell receivables bc money is tight
- Billing and collection of receivables are often time consuming and costly
The transfer of receivables to a third party for cash happens in one of 2 ways
Sales receivables
Secured borrowing
A common type of sales of receivables
Sale to a factor
Factors are
Finance companies or banks that buy receivables from businesses for a fee and then collect remittances directly from customers
Companies sell receivables on either
Without recourse
Or
With recourse
Sale without recourse (non recourse)
Seller assumes no responsibility for any credit losses associated with transferred receivables
Sales with recourse
Seller guarantees payment to purchaser in event the debtor fails to pay
To record this transaction, seller uses financial components approach bc seller has a continuing involvement with receivables
Secured borrowing
Uses receivables as collateral in a borrowing transaction
The three conditions must be met b4 a company can record sale
- Transferred asset has been isolated from transferor
- Transferees have obtained right to pledge or sell assets
- Transferor does not maintain effective control through repurchase agreement
Presentation of receivables
Pg 350
Companies are required to disaggregate based on type of
Receivables
Companies must disclose concentrations of credit frisk for all financial instruments
:)
Accounts receivable turnover
Assess liquidity of receivables
Measures the # of times, on average a company collects receivables during a period
Reconciling items
Deposit in transit
– end of month deposits of cash recorded on depositors books in one month received and recorded by bank
Outstanding checks
–checks written by depositor are recorded when written but may not be recorded by bank until next month
Bank charges
–charges recorded by bank against depositors balance for such items as bank services, printing checks, NSF and safe deposit box rentals. Depositor may not be aware of changes until receipt of bank statement
Bank credits
– collections or deposits by Bank for benefit of depositors that may be unknown to depositor until receipt of bank statement
Bank or depositor errors
– errors on the part of bank or part of depositor cause bank balance to disagree with depositors book balance
Cash short & over used
When petty cash fund fails to prove out.
If cash prove short
It is debited as shortage to cash over and short account
If cash proves over
It is credit to overage to cash over and short
