FAR Module 12A Flashcards
These have to be readily convertible into cash and so near maturity that they carry little risk of changing in value due to interest rate changes.
Cash equivalents
Define cash
Cash includes both cash on hand and demand deposits as well as cash equivalents (including short-term and highly liquid investments)
Generally cash equivalents are investments with original maturities of how long
Three months or less from the date of purchase by the enterprise
Treasury bills, commercial paper, money market funds, and CDs are examples of what
Cash equivalents
T/F
cash set aside for special uses is usually disclosed separately
TRUE
The entry to set up a special fund for cash is what
Debit special cash fund
Credit cash
Any cash that cannot be used (restrictions) within the next year should be classified how
As a long-term/non current asset
T/F
Petty cash funds are generally included in the total cash figure
TRUE
T/F
unreimbursed expense vouchers are usually included in the total cash figure
FALSE
they are excluded
When can two bank accounts be netted against each other
Only when the two accounts are within the same bank
T/F
T-Bills, T-Notes, and T-Bonds are cash equivalents
FALSE
only T-Bills are cash equivalents and only if they have a maturity of 3-months or less
On a bank rec, these reconciliation items do not require any journal entries on the books
These are Type-A reconciliations
What are the three Type-A reconciling items
Outstanding checks
deposits in transit
bank errors
On a bank rec, these reconciliation items require journal entries on the books
Type-B reconciling items
What are the four Type-B reconciling items
Unrecorded returned nonsufficient fund checks Unrecorded bank charges
Errors in the cash account
Unrecorded bank collections of notes receivable
Describe format 1 for bank reconciliations
Balance per bank +/- Type-A adjustments =
correct cash balance
Balance per books +/- Type-B adjustments =
correct cash balance
Describe format 2 for bank reconciliations
Balance per bank \+/- Type-A adjustments \+/- Type-B adjustments = balance per books \+/- Type-B adjustments = correct cash balance
A/R should be disclosed how in the balance sheet
At NRV (gross amount - estimated uncollectibles)
T/F
officer, employee, and affiliate company receivables should be separately disclosed
TRUE
T/F
Unearned interest and finance charges should not be deducted from gross receivables
FALSE
they should be deducted
Sales discount is what type of account
Contra revenue
Cash discounts are generally recognized as expense when
Cash payment is received within the discount period
When must a year end allowance be set up or sales recorded net of discounts
When discounts on year end receivables fluctuate
What is the JE to record a sale under the gross method ?
Debit AR (gross) credit sales (gross)
What is the JE to record cash receipt within the discount period under the gross method ?
Debit sales discount (disc) debit cash (net) credit AR (gross)
What is the JE to record cash receipt after the discount period under the gross method ?
Debit cash (gross) credit accounts receivable (gross)
What is the JE to record a sale under the net method ?
Debit AR (net) credit sales (net)
What is the JE to record cash receipt within the discount period under the net method
Debit cash (net) credit accounts receivable (net)
What is the JE to record cash receipt after the discount period under the net method ?
Debit cash (gross)
credit accounts receivable (net)
credit discount not taken (disc)
T/F
Under both the net and gross methods, sales & A/R is recorded net of trade discounts
TRUE
What are the two approaches to bad debts
Direct write off method
allowance method
Under this approach to bad debt expense, bad debts are considered expensed in the period in which they are written off
This is the direct write off method
T/F
The direct write off method is acceptable under GAAP
FALSE
The direct write off method is not considered acceptable under GAAP unless the amounts are immaterial
This approach to Bad debt expense is the method required for tax purposes
The direct write off method
This approach to bad debt expense seeks to estimate the amount of uncollectible receivables and establishes a Contra valuation account (or allowance for bad debt) for the amount estimated to be uncollectible
This is the allowance method
What is the journal entry for the direct write off method
Debit bad debt expense
credit accounts receivable
What is the journal entry for the allowance method to set up the allowance
Debit bad debt expense (estimated number)
credit allowance for bad debts (estimated number)
What is the journal entry to write off bad debt under the allowance method
Debit allowance for bad debt
credit accounts receivable
What method must you use when approaching bad debts that are material?
The allowance method
Bad debt expense is considered to be what type of expense?
A selling expense
Customers are more likely to buy under credit. Bad debts are a result of allowing A/R, which increases sales
T/F
An appropriate amount of bad debt expense is good for business
TRUE
bad debt expense is a result of allowing sales on account, which increases sales volume
What are the two methods to determine the estimated allowance for bad debts under the allowance method
The percentage of sales method
the aging method
This method of estimating allowance for bad debts is known as the income statement method
The percentage of sales method
This method of estimating allowance for bad debts is known as the balance sheet method
The aging method
How do you calculate allowance for bad debts under the percentage of sales method
Bad debt expense is:
Sales X %
How do you calculate allowance for bad debts under the aging method
Accounts receivable are classified by their age (30, 60, 90, 120 etc. days overdue)
Each subcategory is multiplied by a different percentage based on their likelihood of never being paid
Between the two methods of determining allowance for bad debts (the percentage of sales method and aging method) which one does better matching
Percentage of sales method
The expense is matched directly to the current sales
Between the two methods of determining allowance for bad debts (the percentage of sales method and aging method) which one calculates a more accurate net accounts receivable balance
The aging method
T/F
The policy for charging off uncollectible trade accounts receivable does not need to be disclosed for receivables that have a contractual maturity of one year or less and arise from the sale of goods or services
FALSE
these policies must be disclosed
Describe the T Account for the Allowance Account
Beg. Balance \+ Bad Debts Expense \+ Recoveries - Write Offs = Ending Balance
This method of approaching bad debts decreases both accounts receivable and net income
The direct write off method
Servicing arrangements, recourse arrangements, guarantees, agreements to purchase or redeem transferred financial assets, options written or held, derivative financial instruments that are entered into with contemplation of a transfer, arrangements to provide financial support, pledges of collateral, and transferor’s beneficial interest in the transferred financial asset
These are all examples of what
Transfers and servicing of financial assets
The major type of transfers of financial assets include (6)
Securitization factoring transfers of receivables with recourse repurchase agreements Loan participations bankers acceptances
Purchasing and selling securities that are collateralized by a pool of assets, such as a group of receivables
Securitizations
Selling receivables at a discount to obtain immediate cash
Factoring
Selling receivables at a discount to obtain immediate cash but retaining the risk of loss if the customer does not pay the amount owed
Transfers of receivables with recourse
An agreement to sell an asset to a lender and later repurchase the asset. These agreements are in effect using the asset as collateral for a loan
Repurchase agreements
A situation where a group of financial institutions (called participating interest holders) purchases a share of a financial instruments (loan)
Loan participations
When can you record the giving up of assets as a sale?
When the transferor surrenders control of the financial assets and the following conditions are met:
1) the assets are isolated and beyond the reach of the transferor and its creditors even in bankruptcy or receivership
2) the transferee can pledge or exchange the asset without unreasonable constraints or conditions
3) the transferor does not maintain effective control over the transferred financial assets or a third-party beneficial interest in the assets
Transfers of financial assets are disaggregated into separate components of assets and liabilities. Each entity involved in the transaction does what
1) recognizes only the assets it controls and liabilities it incurred after the transaction has occurred
2) derecognizes assets for which control has been given up or lost and liabilities for which extinguishment has occurred
An order from a customer of a bank for the payment of a specified sum of money (like a post dated check) that may be bought and sold
A bankers acceptances
The important determination in accounting for transfers of assets is whether the transaction is accounted for which of two ways?
1) as a sale of an asset
2) as a secured loan with the asset as collateral
What conditions must be met for a transfer to be accounted for as a sale
1) the transferor surrenders control of the financial assets
2) the transferred financial assets are isolated and beyond the reach of the transferor and its creditors even in bankruptcy or receivership
3) the transferee can pledge or exchange the assets without unreasonable constraints or conditions
4) the transferor does not maintain effective control over the transferred financial assets or a third-party beneficial interest in the assets
Transfers of financial assets are disaggregated into separate components of assets and liabilities. Each entity involved in the transaction recognizes this event how?
1) recognizes only the assets it controls and liabilities it incurs after the transaction has occurred
2) Derecognizes assets from which control has been given up or lost and liabilities for which extinguishment has occurred
The proceeds received from the sale of financial assets equal what?
Cash and other assets obtained (including separately recognized servicing assets) - any liabilities incurred.
When accounting for transfers of participating interests, in order to be eligible for sale accounting how is the financial asset treated?
It cannot be divided into components before the transfer unless all the components meet the definition of a participating interest
What are the four characteristics of a participating interest?
1) the interest is a proportionate ownership interest in an entire financial asset
2) all cash flows received from the assets are divided proportionally among the participating interest holders based upon their share of ownership
3) the rights of each participating interest holder have the same priority
4) no party has the right to pledge or exchange the financial asset until all participating interest holders agree
Define factoring
Factoring traditionally involves the outright sale of receivables to a financing institution known as a factor
What two arrangements are involved in factoring?
1) notification to the customer to forward future payments to the factor
2) transfer of receivables without recourse
What does “without recourse” mean
That the factor assumes the risk of loss from non-collection. Thus, once a factoring arrangement is completed the entity has no further involvement with the receivables unless the customer decides to return the merchandise
What are the two financial benefits to factoring without recourse
1) it permits the entity to obtain the cash earlier
2) the risk of bad debts is transferred to the factor
What is the “holdback” account for?
To protect against the possibility of merchandise returns (which diminish the total amount of the receivables to be collected), the factor will often holdback a portion of the total amount of the receivables factored.
The transferor will charge any merchandise returns to a “factors holdback receivable” account that is created when the receivables are factored. At the end of the return privilege period, any remaining holdback will become due and considered a payable to the factor
What other payments are involved in a factoring situation?
1) a fee to compensate the factor for each of the aspects of the transaction, specifically upon the anticipated bad debt losses
2) interest is charged based on the anticipated length of time between the date the factoring is consummated and the expected collection date of the receivables sold
If factoring arrangements are with recourse, what happens if a customer does not pay the factor
The transferor must pay the factor the amount due on the account
T/F
A transfer with recourse qualifies for sale treatment
Depends
The rules for transfer of receivables with recourse vary by jurisdiction. Therefore, transfers with recourse may or may not qualify for sale treatment
Define an outstanding check
An outstanding check is a check that has been written by a company and deducted from the appropriate general ledger account but it has not yet cleared the bank on which it is drawn. Hence outstanding checks will mean that the balance in the bank account will be greater than the balance in the general ledger account
For a company that uses the allowance method to recognize uncollectible accounts expense, what are the journal entries required at the time of collection of an account previously written off?
Reverse write off :
Debit accounts receivable
Credit allowance for uncollectible accounts
Record cash receipt:
Debit cash
Credit accounts receivable
What is an assignment
An assignment of accounts receivable is a financing arrangement whereby the owner of the receivables (assignor) obtains a loan from the lender (assignee) by pledging the Accounts Receivable as collateral
If financial assets are exchanged for cash or other consideration but the transfer does not meet the criteria for sale the transferor and the transferee should account for the transaction how
As a secured borrowing
And a pledge of collateral
