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Theory of Financial Accounting I > Chapter 7: Cash and Receivables > Flashcards

Chapter 7: Cash and Receivables Flashcards

1
Q

Journalizing gross method of Accounts Receivable

A

Record Accounts receivable at total price without discount

When payment is received within discount period:
Debit: Sales Discounts (contra-account, deduction from sales to arrive at net sales)

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2
Q

Journalizing Factoring Sale with Recourse

A

Debit Cash Received
Debit Due from Factor (proceeds retained to cover potential allowances)
Debit losses on sale (carrying value less net proceeds)
Credit Accounts Receivable (full Amount)
Credit Recourse Liability

Net Proceeds = Cash received + due from factor - less recourse liability

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3
Q

Journalizing factoring sale without recourse

A

Debit Cash (cash received)
Debit Due from Factor
Debit Loss on sale of receivables
Credit Accounts receivable (full Amount)

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4
Q

Due from Factor account

A

Reported as a receivable (Debit up, credit down)

Proceeds retained by the factor to cover probably sales discounts, returns and allowances.

Factor side: recorded as due to customer

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5
Q

Recording fair value option

A

Must make an adjusting entry so that the notes reflect fair value and it is recognized in unrealized holdings

Gain
Debit Notes Receivable
Credit Unrealized holding gain or loss (income)

Loss:
Debit Unrealized holding gain or loss
Credit notes receivable

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6
Q

Fair Value Option

A

Can start using when financial instrument is acquired OR when an event triggers a change, not randomly.

Companies now have the option to record fair value in their accounts for more financial instruments - including receivables.

Unrealized gains and losses are included as part of net income.

If company elects to use the fair value option it must continue to use it as long as the company owns the financial instrument

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7
Q

Unrealized holding gain or loss

A

Net change in fair value of a receivable from one period to another (EXCLUSIVE of interest revenue)

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8
Q

Note for property goods or services when face value does NOT equal fair value

A

DIDN’T UNDERSTAND

Debit Notes receivable (note maturity value)
Credit discount on N/R (Note value - fair value)
Credit Asset (historical price)
Credit Gain on disposal of asset (fair value - historical price)

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9
Q

Carrying Amount (note receivable) on financial statements

A

Note Receivable
Discount on note receivable

Note + Discount = carrying amount
Note - Premium = carrying amount

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10
Q

Notes Receivable on Balance sheet

A

Reported at present value of cash they expect to collect.

Difference between interest rate and market rate is recorded as a discount or a premium, amortized over the life of the note.

Also consider allowance for doubtful accounts

Must disclose fair value in the notes

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11
Q

Imputed Interest Rate

A

DIDN’T UNDERSTAND

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12
Q

Journaling Interest received on note issued at discount

A 
Effective interest method:
Debit Cash (interest payment received)
Debit Discount on note received (amortized amount)
    Credit interest revenue (total)
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13
Q

Premium on note receivable

A

Present value > face value

Premium amortized across life of note to REDUCE annual interest revenue

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14
Q

Effective interest method

A

DIDN’T UNDERSTAND

Method of amortizing discount (or premium) of notes receivable

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15
Q

Journalizing notes receivable when effective rate of interest > stated rate

A

When present value of principle + present value of interest > face value of note

Debit Notes Receivable
Credit Discount on Notes Receivable
Credit Cash

Discount on note receivable then amortized into interest payments

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16
Q

Jounalizing Notes Receivable: zero interest bearing notes

A

Debit Notes Receivable (face value)
Credit Discount on N/R (difference)
Credit Cash

Amortizing discount:
Debit Discount on notes receivable
Credit interest revenue

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17
Q

Discount on notes receivable

A

Contra asset account

Debit decrease, credit increase

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18
Q

Implicit interest rate

A

On zero-interest bearing notes

Future Value - present value = interest amount

then amortized over life of the note

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19
Q

Interest bearing vs zero interest bearing notes

A

Interest bearing - include a stated rate of interest

Zero interest bearing- includes the interest as part of the face amount:

  • Present value = cash paid to user
  • Future value = face value
  • Interest = difference
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20
Q

Journaling notes issued at face value

A

Purchase:
Debit Notes Receivable (total amount paid)
Credit Cash (total amount paid)

Recognizing Interest:
Debit Cash
Credit Interest Revenue

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21
Q

Present Value of a note issued

A

Present value of Principle + Present value of Interest = Present value of note

Face value less present value = interest

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22
Q

Notes Receivable

A

Negotiable instrument from a maker to a payee

may be sold or transferred
considered liquid even if long term because can be converted to cash by a sale

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23
Q

Allowance method for uncollectable accounts on financial statements

A

Receivables shown at net amount expected to be collected

Accounts Receivable
Less allowance for doubtful accounts

Some risk that this can be used to manage earnings (high estimate in good periods balanced against low estimates in bad periods)

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24
Q

Aging schedule

A

Used to determine allowance for doubtful accounts (bad debt expense)

Control device to identify delinquent accounts

classifies customer balances by the length of time they have gone unpaid (ex: 1-30 days, 31-60, 61-90, 90+_

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25
Q

Alternate ways to estimate bad debt

A

Using customers credit ratings:
- useful if historically the business has seen differences in payment across credit ratings

Probability weighted discounted cash flow model (for an individual loan/ receivable)

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26
Q

Estimating Uncollectables: percentage of receivables

A

More appropriate than percentage of sales

  • may use one composite rate for all receivables
  • may set up an aging schedule with different percentages for different aging categories

Because this estimates using total A/R you have to consider the current allowance for doubtful accounts balance when making the adjustment

Technique must be used consistantly

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27
Q

Journalizing Recovery of an uncollectable account

A

Requires two entries (affects only balance sheet accounts)

Reverse Write Off:
Debit A/R
Credit Allowance for Doubtful Accounts

Recognize collection:
Debit Cash
Credit A/R

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28
Q

Journaling Allowance Method for uncollectable accounts

A

REQUIRED when amounts are material
Uncollectable accounts estimated at the end of each period so that expense is recognized in the period when the sale occurs

Estimate:
Debit Bad Debt Expense
Credit Allowance for Doubtful Accounts
(contra account)

Write-Off:
Debit Allowance for Doubtful Accounts
Credit Accounts Receivable

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29
Q

Journaling Direct write-off method for uncollectable accounts

A

Only acceptable when amount is immaterial
Debit Bad Debt Expense (inc)
Credit Accounts Receivable (dec)

Bad debt expense account = only for actual losses (not estimates)

Fails to record expenses in same period as revenue AND amount expected to be collected from A/R is not accurate on the balance sheet

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30
Q

Credit Loss Accounts

A

Bad Debt Expense
+
Uncollectable accounts expense
(expense = debit increase, credit decrease)

Allowance for Doubtful Accounts (Contra asset. Debit decrease, credit increase)

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31
Q

Cash

A

Includes: Money orders, certified checked, cashiers checks, personal checks, bank drafts, savings accounts, petty cash & change funds

also money market funds with checking account privileges

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32
Q

Cash Equivalents

A

Short term, highly liquid investments

  • readily convertible into known amounts of cash
  • so near maturity that there is an insignificant risk of change in value due to change in interest rate (Maturities of 3 months or less)

Treasury Bills, commercial paper, MMF

MAY STILL HAVE TO GET WRITTEN DOWN

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33
Q

Restricted Cash

A

If immaterial amounts: not segregated from cash

If material: can be current or long term asset depending on date of availability (current = year or one operating cycle)

Exportation of currency regulations

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34
Q

Compensating Balances

A

That portion of any demand deposit (time deposit or certificate of deposit) maintained by a corporation which constitutes support for existing borrowing arrangements of the corporation with a lending institution

Minimum balance required by creditors

SEC recommends separately listing on balancing sheet

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35
Q

Bank overdrafts

A

Current liabilities section of the balance sheet

Generally not offset against cash unless cash is present in another account in the same bank where the overdraft occurred

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36
Q

Trade Receivables

A

Accounts receivable and notes receivable

Amounts owed for goods or services rendered

A/R usually 30-60 days
Notes may be short term or long term

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37
Q

Non-Trade Receivables

A

Advances
Deposit
Dividends/ Interest receivable
Outstanding Claim

Generally reported separately

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38
Q

Journaling Recognition of Accounts Receivable

A

Change of control is a deciding factor in determining when a performance obligation is satisfied:

  • Vendor has right to payment from customer
  • Customer has legal title to goods
  • Customer has physical possession of goods (and vendor has neither)
  • Customer has accepted asset

Usually at transaction price

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39
Q

Events that may affect transaction price

A

All FUTURE events

1) Trade discounts
2) Cash discounts (sales discounts)
3) Sales returns and allowances
4) time value of money

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40
Q

Trade Discounts

A

Including quantity discounts

Purchase price recorded as net price
Sales price recorded at net price
Discount and allowances accounts

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41
Q

Cash Discounts

A

Sales Discounts

Intended to induce prompt payment (discount for early payment)

Record A/R at amount EXPECTED TO RECEIVE

If discount not taken credit sales discount forfeited account

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42
Q

Sales Discount Forfeited

A

Shown in revenues and gains section of income statement

Credit Normal Balance

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43
Q

Sales Discount

A

Contra Revenue Account

Debit Normal Balance

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44
Q

Sales Returns and Allowances

A

Contra Revenue Account

Debit Normal Balance

Debited when a return an allowance is granted in same period as sale

Debited to recognize potential future period returns

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45
Q

Allowance for Sales Returns and Allowances

A

Contra Asset Account
Credit Normal Balance

Credited to recognize potential future period returns and allowances

46
Q

Receivables

A

Loans and receivables

Claims held against customers and others for money, goods, or services

Either current (current operating cycle or year) or non-current

Trade vs non-trade

Time value of money is NOT considered for current receivables

47
Q

Reason to transfer Receivables

A
  • to accelerate receipt of cash

- to get cash inflows - as a form of secured borrowing (avoids violating lending agreements)

48
Q

Factors

A

Finance Companies or banks that buy receivables from businesses for a fee and then collect from a customer

Mastercard/visa etc are a type of factoring

49
Q

Factoring sale without recourse

A

Outright sale: seller of receivables assumes no further responsibility for any credit losses associated with the transferred receivables

50
Q

Factoring sale with recourse

A

Seller guarantees payment to purchaser in the event the debtor pays to fail

requires “financial components approach” for seller’s continuing involvement

51
Q

Financial Components Approach

A

Each party to a sale only recognizes the assets controlled and liabilities incurred after the sale

52
Q

Pledge

A

Custodial Agreement when a company transfers receivables for custodial purposes (collateral in a loan)

53
Q

Journaling Secured borrowing

A

Debit Cash
Debit interest expense
Credit Notes Payable

+ normal entries for collecting receivables / paying a note payable

54
Q

Secured borrowing

A

Receivables assigned as collateral for a note

  • firm continues to collect A/R
  • bank assesses finance charges of A/R and note
  • Firm pays bank cash collected on receivables
  • Firm must recognize discounts, returns, allowances, bad debt
  • Money from collections used to retire note obligation WITH interest
55
Q

Conditions for a sale

A

1) Transferred asset has to been isolated from the transferor (transferor no longer has access)
2) Transferee now has right to pledge or exchange the transferred assets/ interest
3) Transferror does not maintained effective control over the transferred asset (via an agreement to repurchase/ redeem before maturity)

If these conditions not met it is secured borrowing not sale)

56
Q

Securitization

A

Takes a pool of assets (various receivables) and sells shares in the pools of interest and principle

securities batched by asset

57
Q

Rules of classifying receivables

A
  • segregate types of receivables if material
  • appropriately offset valuation accounts against the proper receivables accounts
  • Receivables classified as current will be converted into cash in one cycle/ one year
  • Disclose any loss contingencies
  • Disclose any receivables pledged as collateral
  • Disclose the credit risk in receivables and how that risk was arrived at/ assessed
  • Disclose any changes in allowances for credit losses
58
Q

Accounts Receivable Disclosures

A

FASB requires:

  • disclose aging of receivables (roll forward schedule of allowance for doubtful accounts from beginning to end of a period)
  • non-accrual status of receivables by class
  • impaired receivables by types
  • Credit and risk
  • Any concentrations of credit risk that could impact collection
59
Q

Accounts Receivable Turnover

A

To see how successfully a company collects receivables

Number of times on average a company collects its receivables in the period

Net sales / Average Net accounts receivable

Average Net A/R : Beginning + ending balance / 2

(Net sales should be net credit sales but that information is rarely available)

60
Q

Average Days to collect receivables

A

AKA days outstanding

Effectiveness of company’s credit and collection policy

Accounts receivable turnover / 365

ideally not much longer than the credit term period

61
Q

Collectibility assessment based on future cash flows

A
  • Schedule is prepared comparing contracted cash flow to expected cash flow
  • impairment recorded: difference between recorded investment and present value of expected cash flow

Impairment recorded to bad debt expense/ allowance for doubtful accounts

62
Q

Cash

A
  • Most liquid asset
  • Standard medium of exchange
  • Basis for measuring and accounting for all items
  • Current asset

includes: money orders, certified checks, cashiers checks, personal checks, bank drafts, savings accounts, money market funds with checking account privileges, petty cash and change funds

63
Q

Receivables

A

Claims held against customers and others for money, goods, or services

Either current or non current

trade vs non-trade

time value of money is NOT considered for current receivables

64
Q

Allowance method

A
  • Improved matching (over direct write off)
  • Losses are estimated
    - Percentage-of-sales or percentage-of-receivables
  • required by GAAP whenever amount is material
65
Q

Imprest bank accounts

A

to make a specific amount of cash available for a limited purpose. Transfers amount to cover specific expense (eg. payroll) from general checking

66
Q

general checking

A

account company routes all transactions through. money may then be disbursed to other accounts

67
Q

Banking controls

A
  • minimize cash on hand
  • use bank code numbers, not check numbers on deposit slip
  • multiple accounts to minimize collection float
  • memorandums to record: bank charges, interest earned, notes collected

Reconciling balance per books + balance per bank shows lag times and creates additional records

68
Q

Collection Float

A

The difference between the amount of the deposit accounting to the company’s record and collected cash according to bank records

69
Q

Lock-box system

A

System where customers send their checks to a PO box that belongs to a bank. A bank employee empties the box daily and records the deposits into the company’s bank account.

This accelerates the availability of cash and usually provides records of checks collected

worth it in income from faster collections > lockbox cost

70
Q

Six principals of controls activities

A
  • establishment of responsibility
  • segregation of duties
  • documentation of procedures
  • physical controls
  • independent internal verification
  • human resource controls
71
Q

Imprest system for petty cash

A

A way to account for petty cash by maintaining a constant balance in the petty cash account

  • at any time cash plus petty cash tickets must total the amount allocated to the petty cash fund
  • reimbursed when depleted or at the end of the accounting period
72
Q

Principals of internal controls: physical controls

A

Includes:

  • minimize cash on hand
  • safes, vaults, safety deposit boxes
  • locking cabinets, warehouses
  • computer security (passwords, biometrics)
  • video monitoring
  • sensors/ tags
  • time clocks
  • alarm systems
  • use of indelible ink/ watermarks
  • anything to limit physical access to secured items/ cash
73
Q

Petty Cash Fund Controls

A
  • surprise counts to confirm receipts + cash = original (imprest) amount
  • cancelling / mutilating paid petty cash receipts so they cannot be resubmitted
74
Q

Sarbanes-Oxley act regulations

A

Applies to publicly traded US corporations

Companies must:

  • develop principals of control over financial reporting
  • continually verify that the controls are working
  • issue internal control report

independent auditors attest to the adequacy of internal controls (PCAOB oversees)
auditing firm cannot supply auditing and consulting services to the same client
requires a company ensures employee supervision / certifications

75
Q

Bank Reconciliation

A

Schedule explaining difference between bank and company’s record of cash

  • deposits in transit
  • outstanding checks
  • bank charges
  • bank credits
  • bank/depositor errors

Can recognize only one side but generally reconcile both to correct balance

76
Q

Pledging Receivables

A

When a business uses its receivables as securities for a loan

77
Q

Factoring

A

Factor: buys receivables from businesses and then collects from the customers

typically charge a commission to the company - usually about 1% to 3% of receivables purchased

78
Q

Reasons to sell receivables

A

1) receivables may be the only reasonable source of cash
2) billing and collection are time consuming/ costly

sell to a factor (finance company or bank) or only accept credit card sales for credit
- this shortens the operating cycle by accelerating the receipt of cash from collections

79
Q

Trade receivables

A

Accounts receivable and notes receivable

amounts owed for goods or services rendered

A/R usually 30-60 days
Notes may be short term or long term

80
Q

Non-Trade receivables

A

Advances, deposits, dividends/ interest receivable, outstanding claims

generally reported separately

81
Q

Compensating balances

A

That portion of any demand deposit (time deposit or certificate of deposit) maintained by a corporation which constitutes support for existing borrowing arrangements of the corporation with a lending institution

minimum balance required by creditors

SEC recommends separately listing on balance sheet

82
Q

Cash Equivalents

A

Short-term, highly liquid investments

  • readily convertible into known amounts of cash
  • so near maturity, insignificant risk of change in value due to change in interest rate (maturities of 3 months or less)

Treasury bills, commercial paper, MMF

May still get written down

83
Q

Petty Cash Account

A

Asset Account

Establish
Debit (increase) Petty Cash
Credit (decrease) cash

then only record receipts to journal when refilling the cash

Debit various expenses (listed out)
         Credit cash (balance to bring fund to imprest amount)

Missing petty cash goes to cash over/ short

84
Q

Cash Over/Short account

A

Income Statement account - close at the end of a period

Categorized as misc revenue if credit balance (cash over)
Categorized as misc expense in debit balance (cash short)

Short:
Debit Cash Over Short Amount
Credit Sales

Over
Debit Sales
Credit Cash Over Short Amount

85
Q

Recording NSF Check

A

Insufficient funds

Debit (increase) accounts receivable
Credit (decrease) cash

86
Q

A/R Interest Accrual

A

Debit (increase) A/R interest amount

Credit (increase) interest revenue

87
Q

Allowance method for uncollectable accounts

A

Required by GAAP

Record estimated uncollectables in an adjusting entry
Debit Bad debts expense
Credit Allowance for doubtful accounts

Allowance for doubtful accounts : contra-asset account that lowers the value of the asset account

Allows for matching within a period

When writeoff is realized:
Debit Allowance for Doubtful Accounts
Credit Accounts Receivables

Usually percent of sales (income statement) or percent of receivables (balance sheet

88
Q

A/R payment within discount period

A

Debit increase cash
Debit increase sales discount
Credit decrease A/R (full amount)

(only if recorded at GROSS amount)

89
Q

A/R payment Lost discount

A

NET Amount recorded

Debit Cash (full amount)
Credit discount’s forefeited (discount amount)
Credit A/R (net amount)

90
Q

Note Receivable Repayment

A

Debit Cash
Credit Note Receivable
Credit interest Receivable (if already accrued) or Interest Revenue (if not yet accrued)

91
Q

Notes Receivable Issuance and accruals

A 
Debit Note Receivable 
     Credit Cash (for a loan) or Sales  (credit sales) or A/R

When interest accrues
Debit interest receivable
Credit interest reveue

92
Q

Direct write off of uncollectable accounts

A

Not GAAP - violates the matching principal

means the receivable is not stated at net value on the reports

Debit bad debt expense
Credit accounts receivable

listed as an expense on the income statement

If then recovered had to reverse the write off journal entry before journalizing cash payments

93
Q

Disposing of notes receivable Honored

A

Generally note sold to factor before maturity

94
Q

Disposing of notes receivable dishonored

A

Not paid in full at maturity

Defaulted - note no longer negotiable
depends on what end result is expected

Expecting collection: move to A/R
Debit Accounts Receivable for face and interest
Credit notes receivable & interest receivable

write off; write off face value only (no interest recognized)
Debit allowance for doubtful accounts
Credit notes receivable

95
Q

Receivables sold to a factor (aka Factoring)

A

Debit Cash
Debit service charge expense
Credit accounts receivable (decrease)

96
Q

Recognition of A/R

A

Change of control is deciding factor in determining when a performance obligation is satisfied

  • vendor has the right to payment from the customer
  • customer has the legal title to goods
  • customer has physical possession of goods (and vendor does not)
  • customer has accepted asset

usually recorded at transaction price

97
Q

Events that may affect the transaction price

A

All future events:

  • trade discounts
  • cash discounts (sales discounts)
  • sales returns and allowances
  • Time value of money
98
Q

Trade Discounts

A

Includes quantity discount

Purchase price recorded a net price
sales price recorded at net price

99
Q

Cash Discounts

A

Sales discounts

Intended to induce prompt payment (discount for early payment)

Record A/R at the amount EXPECTED to receive (net of discounts)

If discount not taken then Credit sales discount forfeited

100
Q

Recovery of an account previously written off

A

Two part entry

Debit A/R
Credit Allowance for Doubtful Account

Debit Cash
Credit Accounts Receivable

Have to put it back in A/R before can pay it off

101
Q

Sales discounts forfeited

A

Shown in revenues and gains section of income statement

credit normal balance

102
Q

Sales discount

A

Contra-revenue account

Debit normal balance

103
Q

Sales returns and allowances

A

Contra revenue account

Debit normal balance

Debited when a return or allowance is granted in the same period as the sale

debited to recognize potential future period returns

104
Q

Allowance for sales returns and allowances

A

Contra asset account

credit normal balance

credit to recognize potential future period returns and allowances

105
Q

Bank overdrafts

A

Current liabilities section of balance sheet

generally not offset against cash unless cash is present in another account in the same bank where the overdraft occured

106
Q

Restricted cash

A

Not segregated from cash if immaterial amounts

if material can be current or long term asset depending on date of availability
current= year or one operating cycle

exportation of currency regulations

107
Q

Bank reconciliation

A

Single date

Cash Balance per statement 
\+ deposits in transit
- outstanding checks
\+/- bank errors
= balance
Cash balance per books 
\+ notes collected by bank
- NSF / bounced checks
- bank service charges
\+/- company errors
= balance

reconciled balances should match

adjusting entries required for any items adjusting the cash balance per the books

108
Q

Valuing notes receivable

A

Like A/R required that notes receivable are recognized at their net receivable cash value

also uses allowance for doubtful accounts estimated similarly to A/R

109
Q

Net Realizable (cash) value

A

NRV

Accounts receivable less uncollectable A/R = net realizable cash value of A/R

110
Q

Computing Interest

A

Face Value (principle) x Annual interest rate x time as a fraction of a year = interest

time in terms of year = # months / 12 or #days /360
(used to use 360 instead of 365 - may be different now)

date of issue is omitted due date is included

111
Q

Percentage of receivables basis for estimating allowance for doubtful accounts

A

Based on an aging schedule estimated percentage of each category of days past due

takes into account existing allowance for doubtful accounts account balance

Theory of Financial Accounting I (13 decks)

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