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MS2 Accounting Intro Review > Chapter 9: Accounting for Receivables > Flashcards

Chapter 9: Accounting for Receivables Flashcards

1
Q

Interest Period

A

Period of time during which interest is computed - original date of note to maturity date.

When counting by days:

  • count maturity date
  • omit date of issue
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2
Q

Percentage of Receivables Method of Estimating Allowance for Doubtful Accounts

A
  • Focus on accurate valuation of receivables on the balance sheet.
  • Sometimes done as a total percentage of all Accounts Receivable, but often uses an A/R aging schedule.
  • Takes into account any existing balance in Allowance for Doubtful Accounts
  • If credit balance: subtract balance from target balance to get adjustment.
  • If debit balance: add balance to target to get adjustment
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3
Q

Percentage of Sales Method of Estimating Allowance for Doubtful Accounts

A
  • Based on net credit sales
  • Focus on accurate estimation of Bad Debt Expense
  • Method achieves a matching of income statement costs/revenues
  • Any existing balance in Allowance for Doubtful Accounts is ignored (considers sales from current period only)
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4
Q

Aging Schedule

A

Classifies customer balances by the length of time they have been unpaid.
Eg. 1-30 days, 31-60, 61-90, 90+ days

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5
Q

Reasons to Sell Receivables

A

1) Receivables may be only reasonable source of cash
2) Billing and collection are time consuming and costly

Options:

  • Sell to a factor (finance company or bank)
  • Only offer credit in the form of credit card sales (this shortens the operating cycle by accelerating receipt of cash from receivables)
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6
Q

Factoring

A

Factor buys receivables from business then collects cash from the customers.

Typically factors charge a commission to the company - about 1% to 3% of receivables purchsed.

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7
Q

Pros & Cons of Credit Card Sales

A

Pros:

  • Retailer does not need to worry about credit history
  • Retailer receives cash more quickly directly from credit card issuer

Cons:
- Fee of 2%-6% charged by credit card companies

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8
Q

Promissory Note

A

A written promise to pay a specified amount of money at a specified time (the maturity date) or on demand.

Designed like a check with an interest rate

Used:

  • when money is lent or borrowed
  • when the amount of a transaction and credit period exceeds normal limits
  • in settlement of accounts receivable

“Note receivable” to the Payee
“Note payable” to the maker

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9
Q

Receivables (types)

A

Amounts due to an economic entity that are expected to be received in cash.

Accounts Receivable: owned by customers for goods or services sold.

Notes Receivables: claims for formal instruments of credit issued as proof of debt.

Other Receivables: “Nontrade” interest, loans to officers, advances in pay, income tax refundable.

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10
Q

Subsidiary Accounts

A

Accounts where the combined balance makes up the main account

Ex: A/R accounts for each customer = total A/R

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11
Q

Pledging Receivables

A

When a business uses its receivables as securities for a loan.

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12
Q

Journaling Credit Card Sales

A

Includes service charge expense
(Total sales * charge % = service charge)

Debit Cash (increase)
Debit Service Charge Expense (increase)
Credit Sales Revenue (increase)

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13
Q

Journaling Receivables Sold to a Factor (Factoring)

A

Debit Cash (increase)
Debit Service Charge Expense (increase)
Credit Accounts Receivable (decrease)

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14
Q

Journaling Uncollectable Accounts Receivable

A

Accrual accounting: debited to Bad Debt Expense/ Uncollectable Accounts Expense

Cash Accounting - because credit sales aren’t recorded until money is received no bad debt expense exists

Direct write off is not acceptable under GAAP for financial reporting. must use Allowance method

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15
Q

Journaling Accounts Receivable Interest Accrual

A

Debit Accounts Receivable (increase) interest amount

Credit Interest Revenue (increase)

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16
Q

Journaling Disposing of Notes Receivable Dishonored

A

Dishonored = not paid in full at maturity. Defaulted note is no longer negotiable.

If expecting collection eventually: move to A/R
Debit Accounts Receivable (face value + interest)
Credit Notes Receivable
Credit Interest Revenue

If not expecting collection: write off - interest is not recognized
Debit Allowance for Doubtful Accounts (face value only)
Credit Notes Receivable

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17
Q

Journaling Disposing of Notes Receivable Factored

A

Generally note sold to factor before maturity

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18
Q

Journaling Disposing of Notes Receivable Honored

A

Paid in full at maturity

Debit Cash (full amount + interest)
Credit Notes Receivable (face value)
Credit Interest Revenue (if interest not yet recognized)
or
Debit Cash
Credit Notes Receivable (face value)
Credit Interest Receivable (previously recognized)
Credit Interest Revenue (not yet recognized)

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19
Q

Direct Write Off of Uncollectable Accounts

A

Not acceptable under GAAP - violates matching principal (receivable not stated at net value on period reports)

Debit Bad Debt Expense
Credit Accounts Receivable

Listed as an expense on the income statement

If the account is then recovered the above entry has to be reversed before journaling cash payment

20
Q

Journaling Notes Receivable Issuance and Accruals

A 
Debit Note Receivable 
    Credit Cash (for a loan), Sales (for credit sale) or A/R

Recognizing Accrued interest
Debit Interest Receivable
Credit Interest Revenue

21
Q

Journaling Net Receivable Repayment

A

Debit Cash
Credit Note Receivable
Credit Interest Receivable (if already accrued)
Credit Interest Revenue (if not accrued yet)

22
Q

Journaling Accounts Receivable Payment Lost Discount

A 
Debit Cash (full amount)
   Credit Accounts/Receivable (full Amount)
23
Q

Journaling Accounts Receivable Payment within the discount period

A

Debit Cash (increase)
Debit Sales discount (amount of discount)
Credit Accounts Receivable (full amount)

24
Q

Recovery of an Account Previously Written Off

A

Two part entry

1) Reverse write-off (have to put it back before you can pay it off)
Debit Accounts Receivable
Credit Allowance for doubtful accounts

2) recognize payment received
Debit Cash
Credit Accounts Receivable

25
Q

Allowance Method for Uncollectable Accounts

A

Required by GAAP - by recording estimated uncollectables from sales in that period allows for matching in the period.

1) Set up Allowance for Doubtful Accounts contra-asset account (lowers value of asset account) using an adjusting entry at the end of a period
Debit Bad Debts Expense
Credit Allowance for Doubtful Accounts
Amount usually calculated as a $ of sales (income statement) or % of receivables (balance sheet)

2) Realized writeoff:
Debit Allowance for Doubtful Accounts
Credit Accounts Receivable

26
Q

NRV

A

Net Realizable Cash Value

Accounts receivable
Less: Uncollectable Accounts Receivable

27
Q

NRV on Balance Sheet

A

Current Assets:
Accounts Receivable $XXXX
Less: Allowance for Bad Debts ($XX) Total Here

28
Q

Receivables on Income Statement

A

Bad Debt Expense + Service Charge Expense = Selling Expenses (operating expenses)

Interest revenue listed under “other revenues and gains” (not operating)

29
Q

Receivables on Balance Sheet

A
  • Identify each major type of receivable in the balance sheet or in the notes.
  • report short term receivables as current assets
  • report both gross amount of accounts receivable AND allowance for doubtful accounts
30
Q

Valuing Notes Receivables

A

Like Accounts Receivable it is required that notes receivable are recognized at their net realizable cash value (NRV)

Also uses allowance for doubtful accounts - estimation done similarly to Accounts Receivable

31
Q

Credit Card Sales and Bank Reconciliation

A

1) if credit card sales are not yet in the bank statement they are treated as deposits in transit and added to bank balance.
2) When the bank receives the funds it will increase the company’s account and issue a credit memo(randum)

32
Q

Lowering (changing) percentages to calculate Allowance for Doubtful Accounts

A

per GAAP may adjust percentages if the methods are adjusted so that expectations for doubtful accounts changes (ex: credit standards or collection methods change)

33
Q

Valuing Accounts Receivable

A
  • Always a current asset
  • Reported at the amount the company expects to be able to collect (NRV=net realizable cash value)
  • the difficulty is that an unknown amount of receivables will become uncollectable.
34
Q

Accounts Receivable Turnover Ratio

A

measures average numbers of times a company collects its receivables during a period. A measure of liquidity of receivables

Net Credit sales for period / Average Net Accounts Receivable = A/R Turnover

Average Net Accounts Receivable = (Beginning A/R + Ending A/R)/2

35
Q

Acid Test Ratio

A

AKA: quick ratio
More stringent than current ratio, less stringent than cash ratio. Measures if company pay all current liabilities with quick assets

(Cash + Cash Equivalents + Short term investments + Net current receivables) / Total current liabilities

result of 1 or higher is considered safe

36
Q

Quick Assets

A

Cash + cash equivalents + short term investments + net current receivables

37
Q

Analysis of Receivables

A

Ways to evaluate Accounts receivable liquidity

1) Accounts receivable turnover ratio
2) Average collection period

38
Q

Average Collection period

A

Measured in days.
Used to assess effectiveness of credit and collection policies.
The collection period should not exceed the credit term period

365 (days in year) / Accounts receivable Turnover = Average Collection Periods in Days

A variant of the accounts receivable turnover ratio

39
Q

Percentage of Sales basis for estimating allowance for doubtful accounts

A

Percentage determined based on past experience + anticipated credit policy

current period net credit sales x percentage= bad debt expense for period.

Journal entry
Debit Bad Debt Expense
Credit Allowance for Doubtful Accounts

40
Q

Net credit sales

A

Credit sales

less: returns and allowances
less: discounts

41
Q

Computing Interest

A

Face Value (principal) of note x annual interest rate x time (as fraction of a year)

Time is always expressed in terms of a year #months/12 or #days / 365 (used to be 360 to get even numbers)

When counting time date of issue is omitted, due date included

42
Q

Percentage of Receivables Basis for estimating allowance for doubtful accounts

A

Often based on an aging schedule - estimated percentage of each category of days past due

Takes into account existing allowance for doubtful accounts balance

43
Q

IFRS: Entry to record Estimated Uncollectable Accounts

A

Same in IFRS and GAAP

IFRS has more detailed criteria to determine when accounts are uncollectable

May call allowance for bad debts “provisions for bad debts”

44
Q

IFRS Receivables

A

IFRS implies that receivables with different characteristics should be reported separately but does not mandate segregation

IFRS permits partial de-recognition of receivables, GAAP does not.

Receivables do NOT include equity and securities

45
Q

IFRS and Receivables - Factoring

A

In IFRS the criteria to determine how to record factoring transaction is determined by a combination approach that focuses on risks and rewards and loss of control

GAPP only uses loss of control as criterion in determining how to record factoring

MS2 Accounting Intro Review (16 decks)

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