Chapter 7 Flashcards
Short-term, highly liquid investments that can be readily converted to cash with little risk of loss
Cash Equivalents
A company’s plan to encourage adherence to company policies and procedures, promote operational efficiency, minimize errors and theft, and enhance the reliability and accuracy of accounting data
Internal Control
An internal control technique where various functions are distributed amongst employees to provide cross-checking that encourages accuracy and discourages fraud
Separation of Duties
A specified balance a borrower of a loan is asked to maintain in a low-interest or noninterest-bearing account at the bank
Compensating Balance
Percentage reduction from the list price
Trade Discounts
Represent reductions not in the selling price of a good or service but in the amount to be paid by a credit customer if paid within a specific period of time
Cash Discounts
For the buyer, views a discount not taken as a part of the cost of the inventory. For the seller, views a discount not taken by the customer as part of the sales revenue
Gross Method
For the buyer, considers the cost of inventory the include the net, after-discount amount, and any discounts not taken are reported as interest expense. For the seller, considers sales revenue to be the net amount, after discount, and any discounts not taken by the customer as interest revenue
Net Method
The return of merchandise for a refund or for credit to be applied to other purchases
Sales Return
An operating expense incurred to boost sales; inherent cost of granting credit
Bad Debt Expense
The amount of cash the company expects to actually collect from customers
Net Realizable Value
Recording bad debt expense and reducing accounts receivable indirectly by crediting a contra account to accounts receivable for an estimate of the amount that eventually will prove uncollectible
Allowance Method
Estimating bad debt expense as a percentage of each period’s net credit sales; usually determined by reviewing the company’s recent history of the relationship between credit sales and actual bad debts
Income Statement Approach
Determination of bad debt expense by estimating the net realizable value of accounts receivable to be reported in the balance sheet
Balance Sheet Approach
Applying different percentages to accounts receivable balances depending on the length of time outstanding
Accounts Receivable Aging Schedule
An allowance for uncollectible accounts is not used; instead bad debts that do arise are written off as bad debt expense
Direct Write-off Method
Notes that bear interest, but the interest is deducted from the face value to determine the cash proceeds made available to the borrower at the outset
Noninterest-bearing Notes
Operational Assets should be written down if blank has become significant
Impairment of Value
Trade receivables in general rather than specific receivables as collateral; the responsibility for collecting the receivables remains solely with the company
Pledge
Using receivables as collateral for loans where specific receivables go directly toward repayment of a debt if that debt goes unpaid
Assigning
Financial institution that buys receivables for cash, handles the billing and collection of the receivables, and charges a fee for this service
Factor
The company creates a special purpose entity that buys a pool of trade receivables, credit card receivables, or loans from the company and then sells related securities
Securitization
The buyer assumes the risk of bad debts
Without Recourse
The seller retains the risk of uncollectibility
With Recourse
The transfer of a note receivable to a financial institution
Discounting
Comparison of the bank balance with the balance in the company’s own records
Bank Reconciliation
The original terms of a debt agreement are changed as a result of financial difficulties experienced by the debtor
Troubled Debt Restructuring
