Chapter 9 Flashcards
What is cash equivalent?
Coins, currency, checks, money orders, and bank deposits.
Short term highly liquid investments.
Original maturities are within 3 months.
What is a bank overdraft?
Occurs if a company writes checks in amounts that exceed the balance in its account.
Typically recorded as a current liability.
What is a compensating balance?
Minimum cash balances that debtors are required to keep on deposit as support for existing credit agreements.
What is a trade discount?
Reductions of the catalog or list price whenever a company sells to a reseller in the same industry.
What is a volume discount?
Reduces the list price for customers purchasing a large quantity of merchandise.
What is a sales discount?
Reductions granted to customers for early cash payment as an incentive to encourage quick invoice payment.
What is Net Realizable Value (NRV)?
The estimated amount a company reasonably expects to collect from its customer
Measured as the gross accounts receivable minus estimated allowance for uncollectible accounts.
Why do firms record a bad debt expense and where do they record it.
Firms record a bad debt expense to reflect the cost of uncollectible accounts
It is recorded on the income statement.
What is the Allowance method?
Estimates the NRV of accounts receivable and the current periods bad debt expense in the period of the sale.
When do companies write off an account recievable?
When it no longer expects the amount that is due.
Reduces or debits the allowance for uncollectible accounts and also reduces or credits the accounts receivable.
When does a recovery occur?
When a company receives payment on an account it had previously written off.
What does securitization involve?
Combining many separate financial assets into a single pool or bundle.
What is pledging accounts receivable?
Receivables are collateral for a financing arrangement.
What is assigning accounts receivable?
Specifically designated receivables are collateral for the loan, but the company must see the receipts on collection of the receivables to repoay the debt.
What is factoring?
Factoring accounts receivable occurs when a company sells its accounts receivable to a third party, known as a factor, at a discount.
