Chapter 5: Accounting for and Presentation of Current Assets Flashcards
operating cycle
The average time needed for a firm to convert an amount invested in inventory back to cash. For most firms, the operating cycle is measured as the average number of days to produce and sell inventory, plus the average number of days to collect accounts receivable.
cash
A company’s most liquid asset; includes money in change funds, petty cash, undeposited receipts such as currency, checks, bank drafts, and money orders, and funds immediately available in bank accounts.
petty cash
A fund used for small payments for which writing a check is inconvenient.
cash equivalents
Short-term, highly liquid investments that can be readily converted into cash with a minimal risk of price change due to interest rate movements; examples include U.S. Treasury securities, bank CDs, money market funds, and commercial paper.
commercial paper
A short-term security usually issued by a large, creditworthy corporation.
internal control system
Policies and procedures designed to provide reasonable assurance that objectives are achieved with respect to
- The effectiveness and efficiency of the operations of the organization.
- The reliability of the organization’s financial reporting.
- The organization’s compliance with applicable laws and regulations.
financial controls
Features of the internal control system that emphasize accuracy of bookkeeping and financial statements and protection of assets.
administrative controls
Features of the internal control system that emphasize adherence to management’s policies and operating efficiency.
bank reconciliation
The process of bringing into agreement the balance in the Cash account in the company’s ledger and the balance reported by the bank on the bank statement.
deposit in transit
A bank deposit that has been recorded in the company’s cash account but that does not appear on the bank statement because the bank received the deposit after the date of the statement.
outstanding check
A check that has been recorded as a cash disbursement by the company but that has not yet been processed by the bank.
bank service charge
The fee charged by a bank for maintaining the company’s checking account.
NSF (not sufficient funds) check
A check returned by the maker’s bank because there were not enough funds in the account to cover the check.
short-term marketable securities
Investments made with cash not needed for current operations. [accrued as earned]
net realizable value
The amount of funds expected to be received upon sale or liquidation of an asset. For accounts receivable, the amount expected to be collected from customers after allowing for bad debts and estimated cash discounts.
bad debts expense (or uncollectible accounts expense)
An estimated expense, recognized in the fiscal period of the sale, representing accounts receivable that are not expected to be collected.
valuation adjustment
An adjustment that results in an asset being reported at a net realizable value that is less than cost.
carrying value
The balance of the ledger account (net of related contra accounts, if any) of an asset, liability, or stockholders’ equity account. Sometimes referred to as book value.
Allowance for Uncollectible Accounts (or Allowance for Bad Debts)
The valuation allowance that results in accounts receivable being reduced by the amount not expected to be collected.
contra asset
An account that normally has a credit balance that is subtracted from a related asset on the balance sheet.
write-off
The process of removing from the Accounts Receivable account a specific account receivable that is not expected to be collected. Also used generically to describe the reduction of an asset and the related recognition of an expense or loss. [no effect on income statement]
valuation account
A contra account that reduces the carrying value of an asset to a net realizable value that is less than cost.
credit terms
A seller’s policy with respect to when payment of an invoice is due and what cash discount (if any) is allowed.
cash discount
A discount offered for prompt payment.
note receivable
A formal document (usually interest bearing) that supports the financial claim of one entity against another.
collateral
Assets of a borrower that can be used to satisfy the obligation if payment is not made when due.
cost flow assumption
An assumption made for accounting purposes that identifies how costs flow from the Inventory account to the Cost of Goods Sold account. Alternatives include specific identification; weighted average; first-in, first-out (FIFO); and last-in, first-out (LIFO).
specific identification
The inventory cost flow assumption that matches cost flow with physical flow.
weighted average
The inventory cost flow assumption that is based on an average of the cost of beginning inventory plus the cost of purchases during the year, weighted by the quantity of items at each cost.
first-in, first-out (FIFO)
The inventory cost flow assumption that the first costs in to inventory are the first costs out to cost of goods sold.
last-in, first-out (LIFO)
The inventory cost flow assumption that the last costs in to inventory are the first costs out to cost of goods sold.
inventory (phantom) profits
Profits that result from using the FIFO cost flow assumption rather than LIFO during periods of inflation.
inventory accounting system
The method used to account for the movement of items in to inventory and out to cost of goods sold. The alternatives are the periodic system and the perpetual system.
perpetual inventory system
A system of accounting for the movement of items in to inventory and out to cost of goods sold that involves keeping a continuous record of items received, items sold, inventory on hand, and cost of goods sold.
periodic inventory system
A system of accounting for the movement of items in to inventory and out to cost of goods sold that involves periodically making a physical count of the inventory on hand.
physical inventory
The process of counting the inventory on hand and determining its cost based on the inventory cost flow assumption being used.
cost of goods sold model
The way to calculate cost of goods sold when the periodic inventory system is used.
merchandise inventory
Items held by an entity for sale to customers in the normal course of business.
finished goods inventory
The term used primarily by manufacturing firms to describe inventory ready for sale to customers.
raw materials inventory
An asset account that accumulates the costs of materials ready for the production process.
work in process inventory
An asset account that accumulates the costs (raw materials, direct labor, and manufacturing overhead) of items that are in the process of being manufactured.
prepaid expenses
Expenses that have been paid in the current fiscal period but that will not be subtracted from revenues until a subsequent fiscal period when the benefits are received. Usually a current asset. Another term for deferred charge.
deferred charge
An expenditure made in one fiscal period that will be recognized as an expense in a future fiscal period. Another term for a prepaid expense.
prepaid insurance
An asset account that represents an expenditure made in one fiscal period for insurance that will be recognized as an expense in a subsequent fiscal period to which the coverage applies.
collect on delivery (COD)
A requirement that an item be paid for when it is delivered. Sometimes COD is defined as “cash” on delivery.
imprest account
An asset account that has a constant balance in the ledger; cash on hand and vouchers (as receipts for payments) add up to the account balance. Used especially for petty cash funds.
current assets
cash and other assets that are likely to be converted into cash or used to benefit the entity within one year of the balance sheet date
