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MGCR 211 > Chapter 8 > Flashcards

Chapter 8 Flashcards

1
Q

What is a recievable?

A

Claims that are expected to be collected in cash

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2
Q

What are accounts recievable?

A

Amounts owed by the customer from normal business transactions of selling goods or services on credit

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3
Q

What are notes receivable?

A

Claims for which formal credit arrangements between a creditor and a debtor

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4
Q

What is bad debt expense?

A

When customers are not expected to pay you

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5
Q

Journal entry for A/R valuation?

A

(Dr) Bad debt expense

Cr) AFDA (allowance for doubtful account

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6
Q

What iss AFDA?

A

Contra AR account. This records the bad debt at the time of the sale based on an estimated percentage of uncollectibility

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7
Q

Where is AR stated at?

A

Net realizable value

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8
Q

Equation for net realizable value?

A

AR - allowance for doubtful accounts

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9
Q

What will influence the amount uncollectible?

A
  • customer credit
  • company’s credit policy
  • market conditions
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10
Q

If a company’ credit policy to its customers is very lax (not very strict at all), then AFDA is higher or lower under the assumption that all else is equal?

A

Higher

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11
Q

Three steps for account receivable?

A

Estimation
Write-off
Recovery

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12
Q

Journal entry for estimation

A

(Dr) Bad debt expense

(Cr) Allowance for doubtful accounts

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13
Q

Journal entry for write-off?

A

(Dr) Allowanfs for doubtful accounts

(Cr) A/R

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14
Q

Journal Entry for Recovery

A

(Dr) A/R
(Cr) allowance for doubtful accounts

(Dr) Cash
(Cr) A/R

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15
Q

Which account receivable event decreases assets?

A

Estimation

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16
Q

How does estimation affect B/S equation?

A 
Decreases assets
Decreases eqioty (net AR is lower due to increase in AFDA and bad debt expense will decrease net income amount as well)
17
Q

Assume a company uses the allowance method for bad debts. Describe the
impact that the write-off of a bad debt has on the company’s Current ratio?

A

No impact on the current ratio

18
Q

T-Account for A/R

A

(Dr) beginnign balance Credit sales, recovery = reinstatement
(Cr) Cash collection, write-off
(ending balance on Dr)

19
Q

T-Account for AFDA?

A

(Dr) Write off debts
(Cr) Beginning balance, estimated bad debts, recovery = reinstatements
(ending balance on Cr)

20
Q

What does AFDA represent?

A

The estimated amount of the future losses that you will incur when you realize that the AR are uncollectible.

21
Q

Using AFDA how could a company manage earnings upwards with respect to credit policies?

A

If you liberalize credit policies your AR and revenue is higher. Your AFDA will be higher as well but if you ignore AFDA then bad debt expense will be close to 0. In terms of income if you want higher income you want higher revenue and minimize bad debt expense. To do this you can ignore certain amounts of AFDA. So you can liberalize credits policies and ignore certain amounts of AFDA

22
Q

What are the two methods to estimate bad debt expenses?

A

(1) Percentage of credit sales (I/S approach)

2) Aging of accounts receivable (B/S approach

23
Q

How to collect bad debt expense using percentage of credit sales?

A

Bad debt expense = net credit sales * uncollectible %

24
Q

Equation for ending balance of AFDA?

A

Ending balance = beginning balance + bad debt estimation - write off

25
Q

How to calculate amount compay should report as allowance for doubtful accounts using aging methods example

A

Ending AR balance * percentage of ending AR estimated to be uncollectible

Bad debt expense is above calculation - credit balance of AFDA (or plus debit balance)

26
Q

Is it possible to see a debit balance for the unadjusted

AFDA balance on the fiscal-year end date?

A

Yes

27
Q

Journal entry for sales of receivables (factoring)

A

(Dr) Cash, Service charge expense

(Cr) AR

28
Q

Difference between notes receivable and accounts receivable?

A

Notes more formal and for a longer period of time and often have an interest component

29
Q

Formula for calculating interest?

A

Face value of note * annual interest rate * time in terms of one year = interest

30
Q

A/R turnover ratio equation

A

net credit sales/average gross A/R

Average gross A/R =

31
Q

Equation for average collection period?

A

Days in A/R = 365/AR turnover

32
Q

What does a lower A/R turnover ratio tell you

A

(1) Company is having difficulty collecting money from customers or
(2) The company has very generous credit terms with them

MGCR 211 (19 decks)

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