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
Alternate ways to estimate bad debt
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)
26
Estimating Uncollectables: percentage of receivables
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
27
Journalizing Recovery of an uncollectable account
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
28
Journaling Allowance Method for uncollectable accounts
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
29
Journaling Direct write-off method for uncollectable accounts
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
30
Credit Loss Accounts
Bad Debt Expense + Uncollectable accounts expense (expense = debit increase, credit decrease) Allowance for Doubtful Accounts (Contra asset. Debit decrease, credit increase)
31
Cash
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
32
Cash Equivalents
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
33
Restricted Cash
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
34
Compensating Balances
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
35
Bank overdrafts
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
36
Trade Receivables
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
37
Non-Trade Receivables
Advances Deposit Dividends/ Interest receivable Outstanding Claim Generally reported separately
38
Journaling Recognition of Accounts Receivable
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
39
Events that may affect transaction price
All FUTURE events 1) Trade discounts 2) Cash discounts (sales discounts) 3) Sales returns and allowances 4) time value of money
40
Trade Discounts
Including quantity discounts | Purchase price recorded as net price Sales price recorded at net price Discount and allowances accounts
41
Cash Discounts
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
42
Sales Discount Forfeited
Shown in revenues and gains section of income statement Credit Normal Balance
43
Sales Discount
Contra Revenue Account Debit Normal Balance
44
Sales Returns and Allowances
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
45
Allowance for Sales Returns and Allowances
Contra Asset Account Credit Normal Balance Credited to recognize potential future period returns and allowances
46
Receivables
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
Reason to transfer Receivables
- to accelerate receipt of cash | - to get cash inflows - as a form of secured borrowing (avoids violating lending agreements)
48
Factors
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
Factoring sale without recourse
Outright sale: seller of receivables assumes no further responsibility for any credit losses associated with the transferred receivables
50
Factoring sale with recourse
Seller guarantees payment to purchaser in the event the debtor pays to fail requires "financial components approach" for seller's continuing involvement
51
Financial Components Approach
Each party to a sale only recognizes the assets controlled and liabilities incurred after the sale
52
Pledge
Custodial Agreement when a company transfers receivables for custodial purposes (collateral in a loan)
53
Journaling Secured borrowing
Debit Cash Debit interest expense Credit Notes Payable + normal entries for collecting receivables / paying a note payable
54
Secured borrowing
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
Conditions for a sale
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
Securitization
Takes a pool of assets (various receivables) and sells shares in the pools of interest and principle securities batched by asset
57
Rules of classifying receivables
- 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
Accounts Receivable Disclosures
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
Accounts Receivable Turnover
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
Average Days to collect receivables
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
Collectibility assessment based on future cash flows
- 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
Cash
- 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
Receivables
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
Allowance method
- Improved matching (over direct write off) - Losses are estimated - Percentage-of-sales or percentage-of-receivables - required by GAAP whenever amount is material
65
Imprest bank accounts
to make a specific amount of cash available for a limited purpose. Transfers amount to cover specific expense (eg. payroll) from general checking
66
general checking
account company routes all transactions through. money may then be disbursed to other accounts
67
Banking controls
- 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
Collection Float
The difference between the amount of the deposit accounting to the company's record and collected cash according to bank records
69
Lock-box system
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
Six principals of controls activities
- establishment of responsibility - segregation of duties - documentation of procedures - physical controls - independent internal verification - human resource controls
71
Imprest system for petty cash
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
Principals of internal controls: physical controls
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
Petty Cash Fund Controls
- surprise counts to confirm receipts + cash = original (imprest) amount - cancelling / mutilating paid petty cash receipts so they cannot be resubmitted
74
Sarbanes-Oxley act regulations
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
Bank Reconciliation
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
Pledging Receivables
When a business uses its receivables as securities for a loan
77
Factoring
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
Reasons to sell receivables
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
Trade receivables
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
Non-Trade receivables
Advances, deposits, dividends/ interest receivable, outstanding claims generally reported separately
81
Compensating balances
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
Cash Equivalents
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
Petty Cash Account
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
Cash Over/Short account
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
Recording NSF Check
Insufficient funds Debit (increase) accounts receivable Credit (decrease) cash
86
A/R Interest Accrual
Debit (increase) A/R interest amount | Credit (increase) interest revenue
87
Allowance method for uncollectable accounts
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
A/R payment within discount period
Debit increase cash Debit increase sales discount Credit decrease A/R (full amount) (only if recorded at GROSS amount)
89
A/R payment Lost discount
NET Amount recorded Debit Cash (full amount) Credit discount's forefeited (discount amount) Credit A/R (net amount)
90
Note Receivable Repayment
Debit Cash Credit Note Receivable Credit interest Receivable (if already accrued) or Interest Revenue (if not yet accrued)
91
Notes Receivable Issuance and accruals
``` 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
Direct write off of uncollectable accounts
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
Disposing of notes receivable Honored
Generally note sold to factor before maturity
94
Disposing of notes receivable dishonored
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
Receivables sold to a factor (aka Factoring)
Debit Cash Debit service charge expense Credit accounts receivable (decrease)
96
Recognition of A/R
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
Events that may affect the transaction price
All future events: - trade discounts - cash discounts (sales discounts) - sales returns and allowances - Time value of money
98
Trade Discounts
Includes quantity discount Purchase price recorded a net price sales price recorded at net price
99
Cash Discounts
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
Recovery of an account previously written off
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
Sales discounts forfeited
Shown in revenues and gains section of income statement credit normal balance
102
Sales discount
Contra-revenue account Debit normal balance
103
Sales returns and allowances
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
Allowance for sales returns and allowances
Contra asset account credit normal balance credit to recognize potential future period returns and allowances
105
Bank overdrafts
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
Restricted cash
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
Bank reconciliation
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
Valuing notes receivable
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
Net Realizable (cash) value
NRV Accounts receivable less uncollectable A/R = net realizable cash value of A/R
110
Computing Interest
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
Percentage of receivables basis for estimating allowance for doubtful accounts
Based on an aging schedule estimated percentage of each category of days past due takes into account existing allowance for doubtful accounts account balance