Chapter 6 Flashcards
Cash is the most _______ asset
liquid
What are examples of cash
Coin, currency. money orders, certified checks, cashier checks, bank drafts and savings accounts
What are cash equivilets
Short-term, highly liquid investments that are both…
a.) readily convertible cash
b.) so near their maturity that they present little risk of changes in values
What are examples of cash equivalents
Treasury bills, certificates of deposits, commercial paper, and money market funds
What is restricted cash
Cash that has to be used for a specific purpose
What are examples of restricted cash
Plant Expansion, retirement, or long-term debt, contractual agreements, compensating balances
What is a compensating balance
A minimum balance that must be maintained in a bank account and is used to offset the cost incurred by the bank to set up a loan
if it is a compensating balance against short-term borrowings it is reported as…
cash and cash equivilents
If a compensating balance is for a long-term borrowing then it is considered…
non current asset/investment
Bank Overdrafts are
when a company writes a check for more than it has in its cash account
How are bank overdrafts reported
As current liabilities,
If its for the same bank then it offsets against other cash accounts
What are receivables
Claims held against customers and others for money, good, services
How are receivables classified in the balance sheet
- Current or noncurrent
-Trade or non trade
Trade receivables are
receivables directly related to the good/service
What does the revenue recognition principal indicate
that a company should recognize revenue when there is a transfer of control
What is the transaction price for a receivable
The amount the company expects to receive minus any discounts, returns and allowances rebates and performance bonuses
What is the gross method?
That is when receivables are originally recorded w/out consideration of discount
What is the Net Method
when receivables are reported net (subtracted) of the discounts
How do you calculate your Net A/R
A/R minus AFDA
What is the allowance method
When companies estimate uncollectible accounts at the end of each period
What is the entry for estimating the uncollectible
BDE
AFDA
What is the entry for a write off
AFDA
A/R
What is the journal entry for gaining back your write off
A/R
AFDA
What is the journal entry for collecting the reversed write off
Cash
A/R
A write off only affects what…
Balance sheet accounts
What is the method for estimating the AFDA
Percentage-of-receivables approach
- one composite rate
-aging schedule
notes receivable generally originate from…
-Customers who need to extend A/R
-High risk new customers
-Loan to employees and subsidiaries
- Sales on PPE
-Lending transactions
When there is no discount/premium on a notes receivable then…
Stated Rate = Market Rate
In the zero interest bearing not The difference between the PV and FV of the note is the…
discount
how would you record the issuance of a zero interest bearing not
N/R
Discount on N/R
Cash
How would you record the interest revenue at the end of the year from zero interest bearing notes
- discount on notes receivable
Interest Rec
How do you calculate the carrying value
N/R
+ PV interest
+ PV FV
also…
Face Value - Unamortized discount or + Unamortized premium
What are installment notes
- Notes with equal periodic payments for principal and interest
How are short term notes receivable reported
at net realizable value
how are long term notes receivables valued
at cost and also their fair value
Why do owner transfer accounts or notes receivable
- competition
-sell receivables because money is tight - billing and collection are time consuming and costly
What are the two ways to dispose of Receivables
Factoring (selling)
Assignment (secured borrowings)
What are Factors of Receivables
companies or banks that buy receivables for a fee and then collect the payments directly from customers
What is sale without recourse
-Purchaser assumes risk of collection
-Transfer is outright sale of receivable
-Seller records loss of sale
What is sale with recourse
Seller guarantees payment to purchaser
How would you record the journal entry for sale without recourse
Cash (Plug)
Loss on Sale of Receivable (Fee)
Receivable from factor
Receivable
How would you record the transaction for sale of receivables with recourse
1.) Cash (Plug)
2.) Loss on Sale (Fee + Recourse Liability)
3.) Receivable form factor
4.) Receivable
5.) Recourse Liability
What is assignment of Accounts Receivable
A company can borrow money on notes receivable and use accounts receivable as collateral
What is General Assignment
When the company collects amounts and then gives the cash to the lender
What is specific assignment
When the cash the company was supposed to collect goes straight to the lender
*safer for the company
How do you figure out the discount ammortized
Difference between your cash interest received and your interest revenue
