Chapter 6 Flashcards
Why are cash and accounts receivable significant to users?
They are the company’s most liquid assets, providing resources to meet immediate financial obligations.
What are accounts receivable?
Amounts due from customers as a result of the sale of goods or services.
How are cash and cash equivalents recorded?
At face value and measured in Canadian dollars.
What is the purpose of internal control systems?
To safeguard a company’s assets and prevent loss or theft.
List key components of a good internal control system.
- Physical controls
- Assignment of responsibilities
- Separation of duties
- Independent verification
- Documentation
What is a limitation of internal control?
Cost/benefit considerations, human error, collusion, management override, changing circumstances.
What is the purpose of bank reconciliations?
To ensure that accounting records agree with bank records.
Name common reconciling items in bank reconciliations.
- Outstanding cheques
- Outstanding deposits
- Bank service charges
- Errors in recording items
What are the costs associated with selling on account?
- Staff costs for credit granting
- Staff costs for collection
- Bad debts expense
How are accounts receivable valued?
At their carrying value: Gross Receivables – Allowance for Doubtful Accounts.
What are the three key transactions under the allowance method?
- Establish the allowance
- Write off a specific receivable
- Recovery of a specific receivable
What are the two methods for estimating bad debts under the allowance method?
- Percentage of Credit Sales Method
- Aging of Accounts Receivable Method
True or False: The Percentage of Credit Sales Method considers the existing balance in the allowance account.
False
What is the Aging of Accounts Receivable Method?
A method that uses an aging analysis to estimate bad debts based on the balance in the Allowance for Doubtful Accounts.
What is the main focus of the Percentage of Credit Sales Method?
Income measurement.
What does the Aging of Accounts Receivable Method emphasize?
Asset valuation.
When is the direct write-off method acceptable to use?
When the amount of bad debts is immaterial.
How can a company shorten its cash-to-cash cycle?
- Accepting credit cards
- Offering sales discounts
- Selling their accounts receivable
Define liquidity.
The ability to convert assets into cash to pay liabilities.
What are some measures of liquidity?
- Current ratio
- Quick ratio
- Accounts Receivable Turnover Ratio
- Average Collection Period
Fill in the blank: Accounts receivable are amounts owed from customers as a result of selling goods and services on _______.
credit
What does the allowance for doubtful accounts represent?
An estimate of the receivables that will not be collected.
What is the typical policy for writing off accounts under the allowance method?
To write off accounts that have been outstanding for more than 180 days.
What is liquidity?
The ability to convert assets into cash to pay liabilities
Liquidity is crucial for a company’s financial health, as it affects the ability to meet short-term obligations.
