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ACCT 301 > Ch. 7 > Flashcards

Ch. 7 Flashcards

1
Q

Cash is

A

The most liquid

Is the standard medium of exchange and basis for measuring and accounting for all items

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2
Q

Cash consists of

A

Coin, currency and available funds on deposit at the bank

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3
Q

Negotiable instruments such as money orders, certified checks, cashiers checks, personal checks and bank drafts are viewed as

A

Cash

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4
Q

Temporary investments include

A

Money market funds

Money market savings certificates

Certificates of deposits

Similar types of deposits and short term paper

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5
Q

Companies treat postdated checks and I.O.U.’s as

A

Receivables

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6
Q

Travel advances are treated as receivables if

A

Collected from employees or deducted from their salaries , otherwise treated as prepaid expense

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7
Q

Petty cash funds and change funds are used to

A

Meet current operating expenses and liquidate current liabilities, companies include these funds in current assets as cash

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8
Q

Cash equivalents

A

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

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9
Q

Are cash equivalents always cash?

A

No

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10
Q

What are examples of cash set aside?

A

Petty cash, payroll and dividend funds

In most situations these are not material

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11
Q

Restricted cash

A

When material in amount companies segregate restricted cash from regular cash for reporting purposes

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12
Q

Restricted cash is classified as

A

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

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13
Q

Compensating balances

A

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

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14
Q

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

A

To avoid misleading investors about amount of cash available to meet recurring obligations

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15
Q

Bank overdraft

A

Occur when a company writes a check for more than the amount in it cash account

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16
Q

Bank overdrafts should be reported where?

A

Current liabilities section, adding them to amount reported as accounts payable

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17
Q

Receivables

Often referred to as loans and receivables

A

Claims held against customers and others for money, goods, or services

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18
Q

Companies classify receivables as either

A

Current (short term)

Noncurrent (long term)

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19
Q

Companies expect to collect current receivables

A

Within a year or during current operating cycle, whichever is longer

Other receivables are classified as noncurrent

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20
Q

Trade receivables

A

Customers often owe a company amounts for goods bought or services rendered

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21
Q

Accounts receivables

A

Oral fpromises of purchaser to pay for goods and services sold

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22
Q

Accounts receivables are represented as

A

Open accounts ,

Usually collected within 30-60 days

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23
Q

Notes receivables

A

Written promises to pay a certain sum of money on a specified future date

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24
Q

Non trade receivables examples

A
  1. Advances to officers and employees
  2. Advances to subsidiaries
  3. Deposits paid to cover potential damages or losses
  4. Deposits paid as a guarantee of payment or performance

5 dividends and interest receivable

  1. 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
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25
Q

The concept of control is the deciding factor in determining when

A

Performance obligation is satisfied and an account receivable recognized

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26
Q

Transaction price

A

Mount of consideration that a company expects to receive from a customer in exchange for transferring goods or services

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27
Q

Trade discounts

A

To avoid frequent changes in date logs, alter prices for different quantities purchased or to hide true invoice price from competitors

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28
Q

Trade discounts are commonly quoted in

A

%

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29
Q

Cash discounts (sales discount)

A

Induces prompt payment

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30
Q

Companies should record accounts receivables and related revenue at the amount of

A

Consideration expected to be received from customer

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31
Q

Net method

A

Attempts to value receivables at its net realizebale values

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32
Q

Use gross method bc

A

Companies may not use net method for practicability reasons

Net method requires additional analysis and book keeping

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33
Q

Sales returns and allowances

A

Contra revenue account to sales revenues and offsets sales revenue on income statement

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34
Q

Allowance for sales returns and allowances is

A

Contra asset account to acct receivables and offsets accounts receivables on balance sheet

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35
Q

Time values of money

A

Ideally company should measure receivables in terms of present value that is discounted value of cash To be received in the future

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36
Q

Interest revenue

A

Is any revenue after the period of sale

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37
Q

Interest revenue is often ignored related to account receivables bc

A

It is not material in relation to net income for period

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38
Q

Two methods for uncollectible accounts

A

Direct write off method

Allowance method

39
Q

Under direct write off method, bad debt expense will show

Direct method shows

A

Actual losses from uncollectibles

Determines a particular account to be uncollectible

40
Q

Supporters of direct method say that it records

A

Facts not estimates

41
Q

Direct method is deficient because

A

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

42
Q

Direct write off method is not considered appropriate except

A

When the amount uncollectible is immaterial

43
Q

Allowance method

A

Accounts for bad debts involves estimating uncollectible accounts at the end of each period

44
Q

Allowance method ensures that companies state receivables on balance sheet at their

A

Net realizable values

45
Q

Net realizable value

A

Is the net amount the company expects to receive in cash

46
Q

Companies estimate uncollectible accounts and net realizable value using

A

Information about past and current events as well as forecasts of future collectibility

47
Q

Companies use contra asset accounts because

A

They do not know which customers will not pay

48
Q

Companies do not close allowance for doubtful accounts at the end of fiscal year

T or f

A

True

49
Q

When should a company write off an account?

A

When companies have exhausted all means of collecting a past due account and collection appears impossible

50
Q

When a write off occurs , bad debt expense does not

A

Increase

51
Q

Under allowance method, companies debit write off account to

A

Allowance account rather than bad debt expense

52
Q

Recovery of bad debt, like the write off bad debt affects only

A

Balance sheet accounts

53
Q

Expected uncollectible accounts are estimated

A

Based on info on past events(loss experience), adjusted fro current conditions and reasonable forecasts of factors that would affect uncollectible accounts w

54
Q

Percentage of receivables approach

A

Estimate % of outstanding receivables that will become uncollectible

55
Q

Composite rate

A

Reflects an estimate of uncollectible receivables

56
Q

Aging schedule

A

Of acct receivables which applies different % based on past experience to various age categories

57
Q

Aging schedule is gl determine

A

Determine Bad debt expense

Prepare it as control device to determine composition of receivers and identify delinquent accounts

58
Q

Note receivables supported by promissory note,

A

A written promise to pay a certain sum of money at a specific future date

59
Q

Interest bearing notes have

A

Stated rate of interest

60
Q

zero interest bearing notes

A

Include interest as part of face amount

61
Q

Note receivables are considered

A

Fairly liquid even if long term bc companies may easily convert them to cash

62
Q

Companies frequently accept notes receivables form customers who

A

Need to extend the payment period of an outstanding receivables

63
Q

The basic issues in accounting notes receivable are same as those for account receivables

A

Recognition, valuation and disposition

64
Q

Companies record and report long term notes receivable at

A

Present value of cash they expect to collect

65
Q

If a company receives a zero interest bearing note, its

A

PV is the cash paid to issuer

66
Q

Can compute interest rate when you know both

A

FV and PV

67
Q

Interest bearing notes

Stated and effective rate differ

A

True

68
Q

When a note is received in exchange for propert, goods or services in a bargained transaction, the state interest rate is fair unless

A

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

69
Q

Imputed interest rate

A

Resulting interest rate

70
Q

Imputation

A

Process of interest rate approximation

71
Q

Short term notes receivables are reported at

A

Net realizable value

72
Q

Fair value option

A

The option to us FV as basis of measurement in financial statements

73
Q

FV is more relevant than historical cost bc

A

It reflects current cash equivalent value of financial instruments

74
Q

If fair value option is chosen

A

The receivables are record at FV, with unrealized holding gains or losses reported as part of net income

75
Q

Unrealized holding gain or loss

A

Net change in FV of receivables from one period to another, exclusive of interest revenue

76
Q

Any change in fair value is reported as

A

Unrealized holding gain or loss

77
Q

In order to accelerate the crops of cash from receivables,

A

The owner may transfer accounts or notes receivables to another company for cash

78
Q

Reasons for transferring accounts

A
  1. Competitive reasons
  2. Holder may sell receivables bc money is tight
  3. Billing and collection of receivables are often time consuming and costly
79
Q

The transfer of receivables to a third party for cash happens in one of 2 ways

A

Sales receivables

Secured borrowing

80
Q

A common type of sales of receivables

A

Sale to a factor

81
Q

Factors are

A

Finance companies or banks that buy receivables from businesses for a fee and then collect remittances directly from customers

82
Q

Companies sell receivables on either

A

Without recourse

Or

With recourse

83
Q

Sale without recourse (non recourse)

A

Seller assumes no responsibility for any credit losses associated with transferred receivables

84
Q

Sales with recourse

A

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

85
Q

Secured borrowing

A

Uses receivables as collateral in a borrowing transaction

86
Q

The three conditions must be met b4 a company can record sale

A
  1. Transferred asset has been isolated from transferor
  2. Transferees have obtained right to pledge or sell assets
  3. Transferor does not maintain effective control through repurchase agreement
87
Q

Presentation of receivables

A

Pg 350

88
Q

Companies are required to disaggregate based on type of

A

Receivables

89
Q

Companies must disclose concentrations of credit frisk for all financial instruments

A

:)

90
Q

Accounts receivable turnover

A

Assess liquidity of receivables

Measures the # of times, on average a company collects receivables during a period

91
Q

Reconciling items

A

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

92
Q

Cash short & over used

A

When petty cash fund fails to prove out.

93
Q

If cash prove short

A

It is debited as shortage to cash over and short account

94
Q

If cash proves over

A

It is credit to overage to cash over and short

ACCT 301 (12 decks)

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