Chapter 8

Question 1

Receivables

Answer 1

Refers to amounts due from individuals and companies

Expected to be collected in cash

*one of most liquid assets

Question 2

Accounts receivable

Answer 2

Amounts customers owe on account

Result from sale of goods and services

30-60 days

*Most significant type of claim held by a company

Question 3

Notes receivable

Answer 3

Claims for which formaul instruments of credit are issued as evidence of the debt

exted 60-90 days or longer

Question 4

Trade receivables

Answer 4

Notes and accounts receivable that result from sales transactions

Question 5

Other receivables

Answer 5

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

Question 6

Issues with accounts receiveable

Answer 6

1. Recognizing accounts receivable
2. Valuing accounts receivable

Also, accelerated cash receipts from receivables

Question 7

Bad Debts Expense

Answer 7

An expense account to record losses from extending credit

AKA “Uncollectible accounts expense”

Question 8

Direct write-off method

Answer 8

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

Question 9

Allowance method

Answer 9

Involves estimating uncollectible accounts at the end of each period

Provides better matching of expenses with revenues

receievables at net realizable value

Question 10

Cash (net) realizable value

Answer 10

The net amount a company expects to receive in cash from receivables

Question 11

Material

Answer 11

Significant or important information to financial statement users

Question 12

What type of account is Allowance for Doubtful Accounts

Answer 12

a contra account because they do not know which customers will pay

not closed at the end of fiscal year

Question 13

Cash realizable value formula

Answer 13

Accounts receivable - Allowance for doubtful accounts

Question 14

Who writes off accounts?

Answer 14

To maintain good internal control, companies should not authorize someone to write off accounts who also has daily responsibilities related to cash or receivables

Question 15

Write-offs and recovery affect what?

Answer 15

Affects the balance sheet accounts

not the income statement

Question 16

Percentage of receivables basis

Answer 16

Management establishes a percentage relationship between the amount of receivables and expected losses from uncollectible accounts

Question 17

Aging the accounts receivable

Answer 17

Company prepares a schedule in which customer balances are classified by the length of time they have been unpaid

Question 18

Amount of bad debts expense adjusting entry

Answer 18

The difference between the required balance and the existing balance in the allowance account

Question 19

When allowance account has a debit balance prior to adjustment

Answer 19

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

Question 20

Promissory note

Answer 20

A written promise to pay a specified amount of money on demand or at a definite time

Question 21

Maker: promissory note

Answer 21

The party making the promise to pay

Question 22

Payee: promisory note

Answer 22

The party to whom payment is to be made

Question 23

3 uses for promissory notes

Answer 23

When individuals and companies lend or borrow money

When amount of transaction and the credit period exceed normal limits

settlement of accounts receivable

Question 24

Two key parties to a note and entries made

Answer 24

Maker - credits notes payable

Payee - debits notes receivable

Question 25

Three issues in accounting for notes receivable

Answer 25

Recognizing notes receivable

Valuing notes receivable

Disposing of notes receivable

Question 26

Maturity rate: in terms of days

Answer 26

Omit the date the note is issued but include the due date

Question 27

Interest

$730 12% 120 days

Answer 27

730 x 12% x 120/360

Question 28

Fair value: loans and receivables

Answer 28

FASB believes it would be a more accurate view

Banks believe it could cause large swings in a bank’s reported net income

Question 29

A note is honored

Answer 29

A note is honored when its maker pays in full at its maturity date

Question 30

Amount due at maturity

Answer 30

The face value of the note plus interest for the length of time specified on the note

Question 31

dishonored note

Answer 31

A note that is not paid in full at maturity

No longer negotiable

Question 32

Five steps of managing accounts receivable

Answer 32

1. Determine to whom to extend credit
2. Establish a payment period
3. Monitor collections
4. Evaluate the liquidity of receivables
5. Accelerate cash receipts from receivables when necessary

Question 33

Concentration of credit risk

Answer 33

A threat of nonpayment from a single large customer or class of customers that could adversely affect the financial health of the company

Question 34

Net Credit Sales

Answer 34

Net sales - cash sales

Question 35

Receivables turnover ratio

Answer 35

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

Question 36

Average accounts receivable

Answer 36

can be computed from the beginning and ending balances of the net receivables

*assuming seasonal factors are not significant

Question 37

Average collection period

Answer 37

365

Receivables Turnover Ratio

*Measures the average amount of time that a receivable is outstanding

Should not exceed credit term period

Question 38

Captive finance companies

Answer 38

Encourage sale of company’s products by assuring financing to buyers

Owned by the company selling the product

*have responsibility for accounts receivable

Question 39

Reasons for the sale of receivables

Answer 39

1. Size
2. Companies may sell receivables because they may be the only reasonable source of cash
3. Billing and collection are often time-consuming and costly

Question 40

Factor

Answer 40

A finance company or bank that buys receivables from businesses for a fee and then collects the payments directly from the customers

Question 41

Selling of receivables: GAAP

Answer 41

Easy to do under GAAP

difficult to achieve under IFRS