CHAPTER 5 Flashcards
What is a contract?
An agreement (either written or oral) between two parties that creates enforceable rights or performance obligations.
What is the 5 step model to determine when and how much revenue to recognize?
- Identify the contract(s) with the customer.
- Identify the performance obligation(s) in the contract.
- Determine the transaction price.
- Allocate the transaction price to the performance obligation(s) in the contract.
- Recognize revenue when (or as) the entity satisfies its performance obligation(s).
What is a trade discount?
Is reduction in the price of a product or service as an incentive to a business customer to buy it.
What are shipping terms?
Shipping terms in a sales contract dictate the date on which the title, or ownership, of the goods transfers to to the buyer.
What is FOB?
Free on Board which indicates the point at which the seller is free of ownership of the goods.
What is a sales return (allowance)? What is a credit memo?
Customers usually have a right to return unsatisfactory or damaged merchandise to sellers for refund, credit or exchange. If paid cash, customers are entitles to cash refunds for merchandise they return. When a customer returns a product purchase on credit is a credit memo.
What are the sales discounts?
In order to speed up cash flow from credit sales, some businesses offer customers a percentage discount off the sales price if they agree their accounts earlier thatn 30 days. Typically example is 2/10 - 2% off if within 10 business days.
What is a subsidiary ledger?
The Accounts Receivable account in the general ledger shows the total amount receivable from all customers. The subsidiary ledger shows the separate accounts for each individual customer.
What is uncollectible-account expense (doubtful-account expense or bad debt expense)?
Companies rarely collect all of their accounts receivable. Consequently, they must account for their uncollectible accounts. It is the amount the company does not expect to collect.
What is the allowance method?
A method of recording collection losses based on estimates of how much money the business will not collect from its credit customers.
What are the best way to estimate uncollectibles uses the company’s history of collections from customers?
Percent of Sales Method - Aging of Receivables method
Most companies use both methods together. The PoS is used for monthly and quarterly statements because it is easier and quicker to apply. At the end of the year, companies use the Aging method to fine tune their allowances for uncollectibles and ensure their Accounts Receivable are reported at net realizable values on the balance sheet.
What is the percent of sales method?
It estimates a business’s uncollectible account expense as a percent of the company’s revenue. This method is an income- statement approach because it focuses on the amount of expense to be reported on the income statement.
What is the Aging of Receivables method?
The aging method is a balance sheet approach because it focuses on what should be the most relevant and faithful representation of accounts receivable as of the balance sheet date.
What is the Direct Write Off Method?
Less preferable way to account for uncollectible receivables. The company waits until a specific customer’s receivable proves uncollectible. Then, the accountant writes off the customer’s account and records Uncollectiable-Account Expense. Not considered in keeping US GAAP
What is the Quick (acid test) ratio?
Measures a company’s ability to pay its current liabilities with its shorter-term assets - cash and other current assets that are only one step away from cash - marketable securities and net receivables.
Quick Ratio = (Cash and Cash Equivalents + Short Term Investments + Net Current Receivables)/ Total Current Liabilities
