Chapter 7 Flashcards
Cash & Receivables
Cash
Currency and coins, balances in checking accounts, and items acceptable for deposit in these accounts, such as checks and money orders received from customers
Cash Equivalents
Short-term investments that have a maturity date no longer than three months from the date of purchase
Separation of Duties
An internal control technique in which various functions are distributed amongst employees to provide cross-checking that encourages accuracy and discourages fraud
Compensating Balance
Specified balance (usually some percentage of the committed amount) a borrower of a loan is asked to maintain in a low-interest or noninterest-bearing account at the bank
Receivables
A company’s claims to the future collection of cash, other assets, or services
Accounts Receivable
Amounts to be received from the sale of goods or services on account
Trade Discounts
Percentage reduction from the list price
Sales Discounts
Cash discounts; represent reductions not in the selling price of a good or service but in the amount to be received from a credit customer if the amount is paid within a specific period of time
Gross Method
The buyer views a discount not taken as part of the cost of inventory; the seller views a discount not taken by the customer as part of sales of revenue
Credit Losses
Losses due to failure by customers to pay amounts owed for purchase of goods or services; also called bad debts, impairments of receivables, and uncollectible accounts
Allowance Method
Recording bad debt expense and reducing accounts receivable indirectly by crediting the allowance for uncollectible accounts, a contra account to accounts receivable, for an estimate of the amount that eventually will prove uncollectible
Allowance for Uncollectible Accounts
Contra account that reduces accounts receivable to the net amount expected to be collected; also called the allowance for bad debts, the allowance for doubtful accounts, or the allowance for credit losses
Balance Sheet Approach
Determining an income statement amount by estimating the appropriate carrying value of a balance sheet account and then adjusting the account as necessary to reach that carrying value
CECL (Current Expected Credit Loss) Model
A model used to estimate credit losses (bad debts) for receivables as well as those debt investments that are accounted for as held to maturity
Income Statement Approach
Estimating an income statement amount directly, rather than basing it on the change in a balance sheet account
Notes Receivable
Receivables supported by a formal agreement or note that specifies payment terms
Interest-Bearing Note Receivable
Notes that state a principal and interest rate to be paid by a debtor to a creditor
Noninterest-Bearing Note
Notes for which the interest is deducted from the face amount of the note to determine the cash proceeds made available to the borrower at the outset
Effective Interest Method
Calculates interest revenue by multiplying the outstanding balance of the investment by the relevant interest rate
Pledge
When companies pledge accounts receivable as collateral for debt, a disclosure note describes the arrangement
Without Recourse
The buyer assumes the risk of bad debts
With Recourse
The seller retains the risk of uncollectible debts
Securitization
The company creates a special purpose entity (SPE), usually a trust or a subsidiary; the SPE buys a pool of trade receivables, credit card receivables, or loans from the company and then sells related securities
Discounting
The transfer of a note receivable to a financial institution
