FAR 4 Working capital

Question 1

Bank recon

Answer 1

• Balance per books:

LESS: Bank service charge

          NSF check

**Adjusted cash balance **

• Balance per bank:

ADD: Deposits in transit

LESS: Outstanding checks

**Adjusted cash balance **

Question 2

Accounts Receivable

Answer 2

Beginning balance

ADD: Credit Sales

LESS: Cash collected

          Written off

Ending balance

NET REALIZABLE VALUE

Question 3

**Accounts Receivable **

Sales or Cash Discounts

Gross Method

Answer 3

_ Gross Method:_

• Records a sale without regard to the available discount,
• If payment is received within the discount period, a sales discount account is debited to reflect the sales discount.

Question 4

Accounts Receivable

Sales or Cash Discounts

Net Method

Answer 4

** Net Method:**

• records sales net of the available discount
• if payment is received after the discount period, a sales discount not taken account must be credited.

Question 5

Accounts Receivable

Sales or Cash Discounts

Gross Method - journal entries

Selling $100 worth of goods, 2/10, n/30

Answer 5

• Sale

Accounts Receivable 100

      Sales                                100 

• **Received within **

Cash 98

Sales discount 2

             Accounts receivable 100

• **NOT received within: **

Cash 100

        AR              100

Question 6

Accounts Receivable

Sales or Cash Discounts

Net Method - journal entries

Selling $100 worth of goods, 2/10, n/30

Answer 6

• Sale

Accounts Receivable 98

      Sales                                98

• Received within

Cash 98

             Accounts receivable 98

• NOT received within:

Cash 100

        AR                              98
         Sales discount           2

Question 7

TRADE DISCOUNTS

Answer 7

• Sales revenues and accounts receivable are recorded net of trade discounts.
• Trade discounts are applied sequentially.

$100

x 40%

= 40

x10%

= 6

DONT add 40% + 10%, apply sequentially.

Question 8

Sales Returns and Allowances

Answer 8

Sales returns and allowances

             Accounts Receivable

Question 9

Estimating Uncollectible Accounts Receivable

Answer 9

1. Direct Writte off Method (not GAAP)
2. Allowance Method (GAAP)

• Percentage of Sales Method (income statement approach)
• Percentage of Accounts Receivable at Year End Method (balance sheet approach)
• Aging of Accounts Receivable Method (balance sheet approach)

Question 10

Direct Write off method (NOT GAAP)

Answer 10

Bad debt expense

           Accounts Receivable

Question 11

Allowance method

Answer 11

• Percentage of Sales Method (income statement approach)
• Percentage of Accounts Receivable at Year End Method (balance sheet approach)
• Aging of Accounts Receivable Method (balance sheet approach)

Bad debt expense

               Allowance for uncollectible accounts

Question 12

Journal entries for allowance for doubtful accounts

Answer 12

1. Bad debt expense - Provisions made during a year or adjustments at year end

Bad debt expense

               Allowance for uncollectible accounts

_2. Writte off of a specific Account Receivable _

Allowance for Doubtful accounts

               Accounts Receivable 

3. Collection of AR written off AR

• **Direct Write off method **

Cash uncollectible accounts recovered

• **Allowance Method **

AR

       Allowance for uncollectible accounts

Cash

   AR

Question 13

Factoring of Accounts Receivable

Answer 13

Without Recourse - sale is final

Cash

Due from factor

Loss on sale

                Accounts Receivable 

With Recourse - an option to resell back to seller