Chapter Seven: Cash and Receivables

Question 1

What is the most liquid asset?

Answer 1

Cash & Receivables

Question 2

What is constitutes cash?

Answer 2

Coin, currency, demand deposits, and cash equivalents

Question 3

Internal Control of Cash

Answer 3

Procedures put into practice to protect assets

Question 4

Accounts Receivable

Answer 4

right to receive payment which results from sales or services rendered to company or customer

Question 5

Trade receivables

Answer 5

occur in normal process of business

Question 6

Sales Discounts

Answer 6

usually 2/10, net 30

Question 7

Two methods of accounting for Sales Discounts

Answer 7

Gross Method and Net Method

Question 8

Gross Method of Accounting for Sales Discounts

Answer 8

Record at amount of receivable

Question 9

Net Method of Accounting for Sales Discounts

Answer 9

Record as if customer had taken discount

Question 10

How do you reports accounts receivable?

Answer 10

Reported at net realizable value which is amount of cash expect to receive

Question 11

Net realizable value/Book value calculation

Answer 11

Balance of accounts receivable less allowance for uncollectables (estimated) = net realizable value/book value

Question 12

Two Methods for calculating uncollectables

Answer 12

Direct write-off and allowance method

Question 13

Direct write-off method

Answer 13

use for taxes, write off as we determine each account is uncollectable

Question 14

Two methods of allowance method

Answer 14

Percentage of Sales and Percentage of Receivables

Question 15

Percentage of Sales Method (Income Statement Approach)

Answer 15

Estimate using estimate of revenue account to estimate bad debt expense

Question 16

Percentage of Receivables Method (Balance Sheet Approach)

Answer 16

Estimate using AR to estimate balance of allowance account (use input/output)

Question 17

Notes Receivable

Answer 17

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

Question 18

Disposition

Answer 18

transfer of right to receive payments on receivables to 3rd party

Question 19

Two ways to treat Disposition

Answer 19

Secured Borrowing and Sale

Question 20

Types of Secured Borrowing

Answer 20

Pledging and Assigning

Question 21

Pledging

Answer 21

borrowing money from 3rd party and using receivable as collateral

Question 22

What does pledging look like on the books?

Answer 22

Receivable remains on company’s books and liability recorded for cash received + interest

Question 23

Assigning

Answer 23

receivables held by finance company, payments collected by finance company

Question 24

What does assigning look like on the books?

Answer 24

Receivable remains on books and liability recorded

Question 25

What do the payments to the finance company do?

Answer 25

Reduce liability for principal and interest

Question 26

Factoring in Sale of Note Receivable

Answer 26

Occurs when company sells receivables to financial institutions either with recourse or without recourse

Question 27

Factoring without recourse

Answer 27

Completely transferred to finance company and accounted for as sale

Question 28

What 3 conditions need to be met for factoring not without recourse and be accounted for as a sale?

Answer 28

1) beyond creditors reach, 2) transferee has right to sell receivables or pledge for another, 3) transferor has no right to repurchase receivables

Question 29

How is the note treated if it does not meet these 3 conditions?

Answer 29

Treated as borrowing

Question 30

How does a sale without recourse look on the books?

Answer 30

Receivable removed from books and most likely recorded as gain (sometimes loss)

Question 31

How does a sale with recourse look on the books?

Answer 31

Use financial components/borrowing approach