Chapter Seven: Cash and Receivables Flashcards
What is the most liquid asset?
Cash & Receivables
What is constitutes cash?
Coin, currency, demand deposits, and cash equivalents
Internal Control of Cash
Procedures put into practice to protect assets
Accounts Receivable
right to receive payment which results from sales or services rendered to company or customer
Trade receivables
occur in normal process of business
Sales Discounts
usually 2/10, net 30
Two methods of accounting for Sales Discounts
Gross Method and Net Method
Gross Method of Accounting for Sales Discounts
Record at amount of receivable
Net Method of Accounting for Sales Discounts
Record as if customer had taken discount
How do you reports accounts receivable?
Reported at net realizable value which is amount of cash expect to receive
Net realizable value/Book value calculation
Balance of accounts receivable less allowance for uncollectables (estimated) = net realizable value/book value
Two Methods for calculating uncollectables
Direct write-off and allowance method
Direct write-off method
use for taxes, write off as we determine each account is uncollectable
Two methods of allowance method
Percentage of Sales and Percentage of Receivables
Percentage of Sales Method (Income Statement Approach)
Estimate using estimate of revenue account to estimate bad debt expense
Percentage of Receivables Method (Balance Sheet Approach)
Estimate using AR to estimate balance of allowance account (use input/output)
Notes Receivable
different from AR, signed and formal document, interesting bearing, may be long or short term, discounts (contra-asset) and premiums (adjunct) have different IR from market
Disposition
transfer of right to receive payments on receivables to 3rd party
Two ways to treat Disposition
Secured Borrowing and Sale
Types of Secured Borrowing
Pledging and Assigning
Pledging
borrowing money from 3rd party and using receivable as collateral
What does pledging look like on the books?
Receivable remains on company’s books and liability recorded for cash received + interest
Assigning
receivables held by finance company, payments collected by finance company
What does assigning look like on the books?
Receivable remains on books and liability recorded
What do the payments to the finance company do?
Reduce liability for principal and interest
Factoring in Sale of Note Receivable
Occurs when company sells receivables to financial institutions either with recourse or without recourse
Factoring without recourse
Completely transferred to finance company and accounted for as sale
What 3 conditions need to be met for factoring not without recourse and be accounted for as a sale?
1) beyond creditors reach, 2) transferee has right to sell receivables or pledge for another, 3) transferor has no right to repurchase receivables
How is the note treated if it does not meet these 3 conditions?
Treated as borrowing
How does a sale without recourse look on the books?
Receivable removed from books and most likely recorded as gain (sometimes loss)
How does a sale with recourse look on the books?
Use financial components/borrowing approach
