Chapter 7 - Cash & Receivables Flashcards
Define Cash Equivalents and provide 3 examples
Short-term (original maturity 90 days or less), highly liquid
Readily convertible to known amounts of cash
Bears no risk from interest rate changes
Examples:
US Treasury Bills
Commerical Paper
Money Market Funds
Define Restricted Cash and provide 4 examples
Cash accounts with legal restrictions
Ex:
Certificates of deposit (restricted as to maturity)
Compensating balances (restricted as to use)
Bond sinking fund (restricted to be used to retire the bond)
Escrow Accounts
What is the major difference between US GAAP and IFRS in regards to bank overdrafts?
US GAAP - Bank overdrafts must be shown as a liability if there is no right for offset.
IFRS - Bank overdrafts can be netted against cash.
Define Compensating Balances and explain where this amount should appear in the FInancial Statements.
This refers to the minimum balances required to be maintained by customers in their checking or savings accounts.
Companies should state separately legally restricted deposits held as compensating balances against short-term borrowing arrangements among the “Cash and cash equivalent items” in current assets.
Companies should classify separately restricted deposits held as compensating balances against long-term borrowing arrangements as noncurrent assets in either the investments or other assets sections.
Provide examples of Trade and Nontrade Receivables
Trade Receivables:
Accounts Receivable
Notes Receivable
Nontrade Receivables:
advance to suppliers
advance to subsidiaries
claims against creditors for returned or damaged goods
claims against government bodies for tax refunds
Define Net Realizable Value
Accounts receivable less the contra account Allowance for Uncollectible Accounts
Represented on the Balance Sheet
What are the two types of AR Valuation and when are they used
Allowance Method - this method is required under US GAAP when amounts are uncollectible are material.
Direct Write-Off Method - often used for tax purposes but not appropriate under US GAAP unless amount uncollectible is immaterial.
How do you compute Accounts Receivable Turnover?
(AR Beginning Balance + AR Ending Balance)/2
How do you calculate the average AR collection period?
365 / AR Turnover
Define the implicit interest rate of a Note Receivable
If a company receives a zero-interest-bearing note, its present value is the cash paid to the issuer. B/C the company knows both the future amount and the present value of the note, it can compute the interest rate. This is often referred to as the implicit interest rate.
Define the imputed interest rate of a Note Receivable
In note transactions, other factors involved in the exchange, such as the fair value of the property, goods, or services, determine the effective or real interest rate. But, if a company cannot determine that fair value and if the note has no ready market, determining the present value of the note is more difficult. To estimate the present value of a note under such circumstatences, the company must approvimate an applicable interest rate that may differ from the stated interest rate. This process of interest-rate approximation is called imputation. The resulting interest rate is called an imputed interest rate.
