Chapter 7 Flashcards
Cash
Readily available to pay off debt or to use in operations
cash equivalents
Short term, highly liquid investments, NO LONGER THAN 3 MONTHS
Internal control (4)
Encourage adherence to company policies and procedures, promote operational efficiency, minimize errors and theft, enhance reliability and accuracy of accounting data.
Arbanes-Oxleu Act
Company to document its internal controls and asses their adequacy
restricted cash
Cash that is restricted in some way and not available for current use.
compensating balance
amount that compensates the bank for granting the loan or extending the line of credit
A/R
created when sellers recognize revenue associated with a credit sale
Trade discounts
Percentage reduction from the list price
Sales Discounts
Reductions in the amount to be paid by a credit customer if paid within a specified period of time.
Sales returns
Merchandise is returned for a refund or for credit to be applied to other purchases
Allowance
special price reduction, incentive for the customer to keep the merchandise rather than returning it.
How should we account for the fact that not every A/R is likely to be collected
Direct Write Off (Not GAAP)
Allowance method (GAAP)
Direct Write-Off Method
Wait until a particular account is deemed uncollectable and write it off at that time
Allowance Method
Companies use a contra-asset account, the allowance for uncollectible accounts, to reduce the carrying value of A/R to the amount of cash they expect to collect.
Bad Dept Expense
Not recognized when specific accounts are written off
CECL (current expected credit loss)
Consider all receivables and be based on all relevant information including historical experience, current conditions, and reasonable and supportable forecasts
Interest on notes (equation)
Face AmountAnnual RateFraction of the annual period
Discount on note receivable
Represents future interest revenue, is a contra account
Secured borrowing
Pledge accounts receivable as collateral for a loan, no special accounting treatment
Sale of receivables
Can be sold at a gain or a loss like other assets, accounting treatment is similar to that of the sale of other assets
factoring arrangement is made without recourse
buyer can’t ask the seller for more money if the receivables prove to be uncollectable
Company sells accounts recievables with recourse
seller retains all of the risk of bad debts
When is transferor allowed to treat a transfer as a sale?
When company has surrendered control over assets transferred
conditions for transfer of control
-Asset is isolated
-Right to pledge or exchange the asset
-Effective control over the transferred assets
how do companies obtain immediate cash
from financial institution either by pledging a note as collateral for a loan or by selling note
