Chapter 8 Flashcards
Receivables
Refers to amounts due from individuals and companies
Expected to be collected in cash
*one of most liquid assets
Accounts receivable
Amounts customers owe on account
Result from sale of goods and services
30-60 days
*Most significant type of claim held by a company
Notes receivable
Claims for which formaul instruments of credit are issued as evidence of the debt
exted 60-90 days or longer
Trade receivables
Notes and accounts receivable that result from sales transactions
Other receivables
Include nontrade receivables such as interest receivable, loans to company officers, advances to employees, and income taxes refundable
*not from operations
*classified and reported as seperate items
Issues with accounts receiveable
- Recognizing accounts receivable
- Valuing accounts receivable
Also, accelerated cash receipts from receivables
Bad Debts Expense
An expense account to record losses from extending credit
AKA “Uncollectible accounts expense”
Direct write-off method
A method of accounting for bad debts that involves charging receivable balances to Bad Debt Expense at the time receivables from a particular company are determined to be uncollectible
Allowance method
Involves estimating uncollectible accounts at the end of each period
Provides better matching of expenses with revenues
receievables at net realizable value
Cash (net) realizable value
The net amount a company expects to receive in cash from receivables
Material
Significant or important information to financial statement users
What type of account is Allowance for Doubtful Accounts
a contra account because they do not know which customers will pay
not closed at the end of fiscal year
Cash realizable value formula
Accounts receivable - Allowance for doubtful accounts
Who writes off accounts?
To maintain good internal control, companies should not authorize someone to write off accounts who also has daily responsibilities related to cash or receivables
Write-offs and recovery affect what?
Affects the balance sheet accounts
not the income statement
Percentage of receivables basis
Management establishes a percentage relationship between the amount of receivables and expected losses from uncollectible accounts
Aging the accounts receivable
Company prepares a schedule in which customer balances are classified by the length of time they have been unpaid
Amount of bad debts expense adjusting entry
The difference between the required balance and the existing balance in the allowance account
When allowance account has a debit balance prior to adjustment
Occurs because the debits to the allowance account from write-offs exceeding the beginning balance in the account which was based on previous estimates for bad debts
Promissory note
A written promise to pay a specified amount of money on demand or at a definite time
Maker: promissory note
The party making the promise to pay
Payee: promisory note
The party to whom payment is to be made
3 uses for promissory notes
When individuals and companies lend or borrow money
When amount of transaction and the credit period exceed normal limits
settlement of accounts receivable
Two key parties to a note and entries made
Maker - credits notes payable
Payee - debits notes receivable
Three issues in accounting for notes receivable
Recognizing notes receivable
Valuing notes receivable
Disposing of notes receivable
Maturity rate: in terms of days
Omit the date the note is issued but include the due date
Interest
$730 12% 120 days
730 x 12% x 120/360
Fair value: loans and receivables
FASB believes it would be a more accurate view
Banks believe it could cause large swings in a bank’s reported net income
A note is honored
A note is honored when its maker pays in full at its maturity date
Amount due at maturity
The face value of the note plus interest for the length of time specified on the note
dishonored note
A note that is not paid in full at maturity
No longer negotiable
Five steps of managing accounts receivable
- Determine to whom to extend credit
- Establish a payment period
- Monitor collections
- Evaluate the liquidity of receivables
- Accelerate cash receipts from receivables when necessary
Concentration of credit risk
A threat of nonpayment from a single large customer or class of customers that could adversely affect the financial health of the company
Net Credit Sales
Net sales - cash sales
Receivables turnover ratio
Net Credit Sales
Average Net Receivables
Measures the number of times, on average, a company collects receivables during the period
*asses the liquidity of receivables
Average accounts receivable
can be computed from the beginning and ending balances of the net receivables
*assuming seasonal factors are not significant
Average collection period
365
Receivables Turnover Ratio
*Measures the average amount of time that a receivable is outstanding
Should not exceed credit term period
Captive finance companies
Encourage sale of company’s products by assuring financing to buyers
Owned by the company selling the product
*have responsibility for accounts receivable
Reasons for the sale of receivables
- Size
- Companies may sell receivables because they may be the only reasonable source of cash
- Billing and collection are often time-consuming and costly
Factor
A finance company or bank that buys receivables from businesses for a fee and then collects the payments directly from the customers
Selling of receivables: GAAP
Easy to do under GAAP
difficult to achieve under IFRS
