Final Flashcards
What are cash equivalents?
Short-term highly liquid investments that are both (a) readily available known amounts of cash and (b) so near their maturity that they present insignificant risk of changes in value because of changes in interest rates
If a company combines cash and short-term investment together where are the short-term investments reported?
They are reported in parenthetically or in the notes.
When a cash equivalent bought at auction-rates has declined on value how does that affect the company?
The company incurs a large write-down which is when the value of the asset no longer matches fair market value
Cash equivalents are considered highly liquid because they could be trade in auctions on a daily basis?
These used to be considered highly liquid but now there is no market to trade cash equivalents.
When times are good, some carelessness in accounting may work
True, but on the contrary when times are bad it is painfully obvious that slopping accounting leads to misleading and harmful effects to financial statements.
When restricted cash is immaterial some companies will combine with cash.
True, but when material they are segregated.
Restricted cash includes
Petty cash, payroll and dividend funds, ect.
Cash equivalents include
Treasury bills, commercial paper, money market funds, bank certificate of deposits (CDs), bankers acceptance, etc.
Cash equivalents have
high credit quality, highly liquid, low-risk and low return profile.
What are the three main asset classes?
Cash equivalents, stocks and bonds.
Restricted cash can be current or non-current (long-term) asset
True, it depends when it is expected to be used.
Money held in other countries are classified as cash and cash equivalents?
Generally, it is classified as restricted cash because there are potential restrictions such as regulations against exportation of currency.
What are examples of long-term restricted cash?
Plant expansion, retirement for L-T debt, or even entry fee deposits in cases such as International Thoroughbred breeders.
A portion of any demand deposit maintained by a corporation which constitutes support for existing for existing borrowing arrangements of the corporation with a lending institution.
Compensating balances
When are compensating balances required?
Banks and other lending institutions often require customers to maintain minimum cash balances in checking or savings accounts.
What are legally restricted deposits?
Compensating balances held against short-term borrowing arrangements among the “cash and cash equivalent items” in current assets.
Legally restricted deposits are required by who?
The SEC does not require but RECOMMENDS companies report it separately to avoid misleading investors about the amount of cash available to meet recurring obligations.
Companies should report restricted cash for compensating balances of short-term and long-term borrowing arrangements separately?
True, and compensating balances against long-term borrowing arrangements should be in the noncurrent assets in either investments.
Bank overdrafts are reported as:
Current liabilities and added to accounts payable
If material where should bank overdrafts be reported?
Separately, either on the face of the balance sheet or in related notes.
Bank overdrafts generally do not offset cash accounts except,
when available cash is present in another account in the same bank, in this case off setting is required
Receivable are
Claims held against customers and others for money, goods or services
Trade receivables are cash equivalents?
False, receivables are not highly liquid.
What are trade and non trade receivables?
A sub-classification of accounts receivable or notes receivable
Accounts receivable are oral promises of the purchaser to pay for goods and services sold?
True, they represent “open accounts” resulting from short-term extensions of credit.
Notes receivables are:
Written promises to pay a certain sum of money on a specific future date.
The basis issues with account and notes receivables?
Recognition, valuation and disposition.
What is usually recognized as the amount of exchange for receivable?
The exchange price is the amount due from debtor. Usually an invoice.
What might make it hard to measure the exchange price of receivables recognition?
(1) the availability of discounts (trade and cash discounts) and (2) the length of time between the sale and the due date of payments (the interest element)
Why do companies use trade discounts?
To avoid frequent changes in catalogs, to alter prices for different quantities or to hide the true invoice price from competitors
Sales discount forfeited is a debit or credit account?
credit
Under gross method, proper expense recognition dictates that company do what when discounts are expected?
Reasonably estimate the expected discounts to be taken and charge that amount against sales.
Under the net method, sales discounts forested are classified are what?
Other revenue
How should receivables be reported in value?
Present value, the discounted value of cash to be received in the future
When do companies not include present value of receivables?
When the receivable is due in less then a year and in normal course of business.
According to the valuation of receivables what is involved?
(1) classification and (2) the valuation on the balance sheet
What does classification of accounts what in regards to the valuation?
The length of time each receivable will be outstanding (short-term/long-term)
How do companies value and report receivables?
at net realizable value - the net amount they expect to receive in cash.
Net realizable value is determined by?
Estimating both uncollectible receivables and any receivables and returns and allowances.
Under the direct write off method, bad debt expense shows
actual losses
The direct-write is theorctiaclly deficient.
It fails to record exposes in the same period as associated revenues. Violating the expense recognition method.
When the amount is immaterial the direct method is appropriate.
True
What does a company do when an accounts has been deemed uncollectable but receives payment.
They reverse the entry made to write off the uncollectible account. Debit accounts receivable and credit allowance for doubtful accounts.
Using the percentage of sales estimation emphasizes what
the expenses and revenues (income statement)
Usings the percentage of accounts receivables emphasizes what?
the net realizable value of accounts receivable (balance sheet)
