chapter 8 Flashcards
what are the three types of receivables?
accounts receivable, notes receivable and other receivables
what are accounts recievable?
amounts owed by customers, collected within 30 to 60 days and are current assets. credit terms set out the time period in which a receivable is due
what are notes receivable?
arewritten promises to repay debt. These notes normally require the payment of interest and are due after 30 days or longer, may be current or non current assets
what are other non trade receivables?
Receivables (such as interest receivable, loans to company officers, and income tax receivable) that do not result from the operations of the business.
in general, how are accounts recievable recorded for a service company and a merchandising company?
For a service company, a receivable is recorded when a service is provided on account.For a merchandising company, a receivable is recorded at the point of sale of merchandise on account.
what is a subsidiary ledger?
A ledger that is used to manage the detailed information that would be difficult to track in a general ledger account.
what is the control account?
An account in the general ledger that summarizes the details for a subsidiary ledger and controls it.
what is the allowance method?
Companies will use the allowance method to account for their expected credit losses.
how do you account for allowance method
Dr. bad debt expense
Cr. doubtful accounts
what are credit losses
(aka Bad debt expense) are presented on the Statement of Income in the operating expenses section.
what is allowance for expected credit loses/
Allowance for expected credit losses is a contra asset account, it is linked to the accounts receivable account and the net amount (aka carrying amount) is presented on the Statement of Financial position.
what is aging of accounts recievable?
This is an analysis where different percentages are applied to receivables that have been classified by length of time outstanding.
how do you record uncollectible accounts?
Dr. Allowance for expected credit losses XXX
Cr. Accounts receivable
how do you record if you randomly get money from someone who you thought was going bankrupt
Dr. Accounts receivable XXX
Cr. Allowance for expected credit losses XXX
Dr. Cash XXX
Cr. Accounts receivable
what are similarities between an accounts receivable and notes receivable?
financial asset, credit instrument, reported on a balance sheet at according amount, related credit losses reported on a abalone sheet
what are differences between accounts receivable and nites receivable?
AR: informal premise to pay, bears interest only after due date, shprt term, current asset
notes reciebvanle: formal writen promise, bears interest from the date issued, can be short term of long term, can be non current or current
on a balance sheet, where are short term receivables reported
in the current assets section, after cash and trading investments (if from most to least liquid ), at carrying amount
on the balance sheet, where are trade receivables recorded?
must be reported separately from receivables from related parties and other types of receivables. Trade receivables are reported at their carrying amoun
how are receivables due more than a year from now recorded on the balance sheet?
must be presented separately in the non-current assets section of the statement
which statement do you use to record a credit lose
are reported as an operating expense on statement of income
what are the four steps for managing accounts receivable?
- Determine who to extend credit to (how much and which customers should receive credit)
- Establish a payment period (should be consistent with competitors)
- Monitor collections (prepare aging schedules on regular basis)
- Evaluate liquidity of receivables (using liquidity ratios)
If the credit policy is too tight
the company may lose revenue because customers who are denied credit may do business elsewhere.
if credit policy is too loose?
the company may end up extending credit to risky customers who pay late or do not pay at all.
what should a credit period be like?>
consistent to one like its competitors
what are the uses of the aging schedule?
- helping estimate the allowance for expected credit losses
- The aging schedule helps management estimate the timing of future cash inflows, which is very important when preparing a cash budget
- It also provides information about the company’s overall collection experience, and it identifies problem accounts
when can credit risk increase?
during periods of economic downturn
what is the receivables turnover ratio and how do you calculate it?
A measure of the liquidity of receivables
.dividing credit sales by the average gross accounts receivable during the year. higher the amount, more liquid it is
what is gross accounts receivable?
Gross accounts receivable is the amount reported in the Accounts Receivable account (before deducting allowance for expected credit losses)
how do you calculate the average gross accounts recievable>?
Unless seasonal factors are significant, average gross accounts receivable can be calculated by adding together the beginning and ending balances and dividing by 2
what is the average collection period and how do you calculate it?
The average amount of time that a receivable is outstanding. It is calculated by dividing 365 days by the receivables turnover. want it to be lower because more liquid
what is the average cllecton period used for?
used to assess the effectiveness of a cpmaies credit and collection policies.
what is the general rule for the average collection period
that the collection period should not greatly exceed the credit term period (the time allowed for payment).
The higher the receivables turnover and the lower the average collection period,
the more liquid the company’s receivables generally are.
