Exam 2 - Chapters 5 & 8 Flashcards
Answer:
___(a)___ is the most liquid asset
a. cash
Answer:
Cash is a standard of ___(a)___
a. medium exchange
Answer:
Cash is the basis for measuring your ___(a)___
a. business transactions
Answer:
What is the number one most current asset in the current asset section of the balance sheet?
Cash
List:
Types of Cash
- Cash (petty cash, money orders from customers, or checking/savings accounts)
- Cash equivalents
Answer:
Cash equivalents are not ___(a)___, but are listed together with ___(b)___
a. cash
b. cash
Define:
Cash equivalents
Short-term, highly liquid investments that are both readily converted to cash within 3 months or less and so near their maturity that they present insignificant risk of change in interest rates
Answer:
In what time frame must cash equivalents be able to be liquidated into cash?
3 months
List:
Types of T-Bills
- Treasury bills
- Commercial papers
- Money market funds
Define:
T-Bills
Considered to be a very, very short-term investment and is very liquid in the market
You can cash them out immediately almost within 3 months or less
Define:
Cash Receivables
The money the customers owe you for goods or services
Answer:
Typically, accounts receivable are recognized at ___(a)___
a. exchange price
Define:
Exchange price
The price that occurs at the transaction date when a customer purchases something from you
List:
3 Things that Effect Value of Accounts Receivable
- Sales Discounts
- Sales Returns/Allowances
- Uncollectible Accounts Receivable
Answer:
If you have cash discount, it is going to affect the value of your ___(a)___
a. accounts receivable
Define:
Cash Discounts
Discounts you give customers to encourage them to pay you earlier.
Causes your original transaction price to change
Example: Offer 5% off if they pay within 10 days, which decreases the transaction price if customer utilizes it
Example:
Cash Discount
You give customers 5% off the original transaction if they pay within 10 days, which lowers the amount of the transaction (the accounts receivable) by 5% if customer pays in 10 days
Answer:
What happens when an accounts receivable is not paid within 30 days?
It cannot be an accounts receivable anymore. The customer’s account is converted to a notes receivable so company can earn interest on unpaid amount
This is dependent on company policies (may not be 30 days)
Define:
Sales Returns
When customers aren’t satisfied with their purchase and they return the physical item within the return window, they receive cash back
Answer:
What happens to the accounts receivable when you have a sales return?
The accounts receivable is cancelled and you no longer expect cash from the customer
Define:
Sales Allowances
Negotiated reductions in sales prices after the sale
When customers don’t return physical goods, but are not completely satisfied with the goods so they renegotiate the price after the original transaction.
This lowers the amount of the accounts receivable
Answer:
Explain how sales allowances impact accounts receivable
The price of the transaction is decreased after the transaction so the amount of the accounts receivable decreases
Answer:
When we have a sales return or allowance, we ___(a)___ doubtful and ___(b)___ accounts receivable
a. debit
b. credit
Answer:
When we have a sales return or allowance, we debit ___(a)___ and credit ___(b)___
a. doubtful
b. accounts receivable
Answer:
On the balance sheet, you will find the ___(a)___ listed with the accounts receivable
a. contra-asset
Answer:
On the balance sheet, you will find the contra asset listed with the ___(a)___
a. Accounts Receivable
Answer:
Where is the accounts receivable in relation to the contra-asset account?
Accounts receivable is immediately before the contra-asset account
Answer:
Allowance for accounts is a ___(a)___ to ___(b)___ on the balance sheet
a. contra-asset
b. accounts receivable
Answer:
A contra-asset account is for a/an ___(a)___ for ___(b)___ on the balance sheet
a. allowance
b. doubtful accounts
Answer:
Any amounts put in as an allowance for doubtful accounts will ___(a)___ the net realizable value of ___(b)___
a. decrease
b. accounts receivable
Equation:
Net Realizable Value of Accounts Receivable
Net Realizable Value of Accounts Receivable
=
Gross Accounts Receivable
-
Allowance for Doubtful accounts
Answer:
What information is contained on the the antra-asset account of the balance sheet?
Uncollectible accounts receivable, which is an estimate
Shows the amount they think may not be collected in the future
Answer:
Who receives the information contained in the contra-asset account?
Outsiders: creditors and shareholders
Answer:
Why is the contra-asset account shared with outsiders (creditors and stockholders)?
Allowance for doubtful accounts tells outsiders what proportion of accounts receivable won’t be collected in cash
It tells them about the future cash flows.
The accounts receivable shows the amount of cash that will be realized in the future
Answer:
Because the contra-asset account is connected to ___(a)___, although it is just a/an ___(b)___, we still enforce managers to give us the ___(c)___
a. future cash flow
b. estimate about future uncollectibilities
c. estimate
Answer:
We use the ___(a)___ to account for contra-assets on the balance sheet
a. allowance method
Answer:
The most critical thing in the allowance method is ___(a)___
a. timing
Answer:
In the ___(a)___, the credit scales mean that you ___(b)___, instead you ___(c)___
a. allowance method
b. did not receive cash
c. accounts receivable
Answer:
Managers must make ___(a)___ about what portion of accounts receivable ___(b)___
a. estimates
b. won’t be collected in cash
Answer:
When managers estimate allowances/contra-assets they ___(a)___
a. debit bad debt expense
Answer:
An allowance for a doubtful account will affect the ___(a)___
a. balance sheet
Answer:
Assuming a $100 sale, cash discounts for accounts receivable are 2% if paid in 10 days, it is written as ___(a)___
a. 2/10
Answer:
How are cash sales discounts written?
discount %/days
n/30
Answer:
If sales returns are small I amount, you adjust ___(a)___ and create a ___(b)___ called ___(c)___ when the merchandise is returned
a. accounts receivable
b. contra to sales
c. sales returns
Answer:
Sales allowances are ___(a)___ in sales price ___(b)___
a. negotiated reductions
b. after the sale
Answer:
Apply the allowance method for ___(a)___ and ___(b)___
a. uncollectibles
b. estimates of bad debt expenses
Answer:
The allowance method is based on the ___(a)___
a. matching principle
Answer:
The allowance method estimates future uncollectibles ___(a)___, instead of ___(b)___
a. now
b. waiting until they actually go bad
Answer:
On the balance sheet, the allowance for bad debts is recorded as a/an ___(a)___ so we ___(b)___ the estimate
a. expense
b. credit
Define:
Income Statement approach to Estimation of Uncollectibles
Based on percentage of sales
Matching
Credit sales - - - Bad debt expense
Define:
Balance Sheet Statement approach to Estimation of Uncollectibles
Based on percentage of receivables
Net realizable value
Receivables - Allowance for Bad Debt
Equation:
Percentage of Sales Method
Bad Debt Expense = Sales x %
usually based on credit sales
Answer:
The income statement approach to estimation of uncollectibles is also known as ___(a)___
a. Percentage of Sales approach
Answer:
The balance sheet approach to estimation of uncollectibles is also known as ___(a)___
a. Percentage of Receivables approach
