FS Accounts

Question 1

What/What not to include in Cash

Answer 1

Include: Coin/currency, petty cash, cash in bank, negotiable instruments (ordinary checks, cashier’s checks, certified checks, money orders)
Exclude: Certificates of deposit, legally restricted compensating balances, restricted cash funds (bond sinking fund)

Question 2

Cash Equivalent Examples

Answer 2

U.S. Treasury obligations ( bills, notes, bonds), commercial paper (very short-term corporate notes), money market funds`

Question 3

Compensating Balance

Answer 3

Min balance must be maintained by firm in relation to borrowing.

• -If balance is related to ST liability compensating balance is shown as current asset (restricted balance), but not considered part of unrestricted cash balance
• -If balance is related to LT liability compensating balance is non-current asset

Question 4

Receivables Valued at:

Adjustments made to Nominal Value

Answer 4

Valued at Net Realizable value (amt cash expect to get at due date.

Adjustment to nominal Value:
Quantity/Sales Discounts
Sales Return and Allowance
Non-Collectible Accts

Question 5

Recording methods for receivables

Answer 5

Gross Method- records receivables @ gross invoice price(before cash discount)
Net Method- Records receivables @ net invoice price(after cash discount)

Question 6

Methods for Uncollectible Accts

Answer 6

Direct Write Off Method

Allowance Method

Question 7

Direct Write-off Method

Answer 7

Used only if specific acct is considered uncollectible & written off. Only used when when firm is unable to estimate uncollectible A/R accts reliably

1. NEG: poor matching revenues&expenses, recog revenue one yr and bad debt expense in subsequent yr
2. POS: Simple/practical to use, may not be materially diff in its effect on FS retaliative to allowance method

Question 8

Allowance Method

Answer 8

Records estimate of bad debt expense @ each yr end in adj entry-allowance (contra AR) is created and reduces net AR
POS: Allows companies to value AR @ net realizable value on BS AND allows companies to recognize rev/exp from credit sales in same accting yr

Question 9

Ways to estimate Bad Debt Expense in Yr-end Adj Entry

Answer 9

1. Income Statement Approach

2. Balance Sheet Approach

Question 10

Income Statement Approach

Answer 10

Based on observation of prior yrs, company may estimate bad debt exp as percentage of credit sales. No consideration to existing balance in allowance acct is given

Question 11

Balance Sheet Approach

Answer 11

• -Based on observation of prior yrs, estimates bad debt exp by analyzing ending AR. May result in % to ending AR OR may analyze ending AR by aging ending AR and grouping AR by outstanding accts then apply various est of inconvertibility to each group of receivables
• • Analysis of ending AR is to determine needed balance in allowance acct. after needed amt is determined it is compared to existing balance in allowance acct and difference in two balances is amt of Bad Debt Exp

Question 12

Criteria for sale of transfer receivable under GAAP

Answer 12

1. Transferred assets have been isolated from transferor
2. Transferee is free to pledge or exchange asset
3. Transferor doesn’t maintain effective control over transferred assets either thru agreement that allows transferor to repurchase asset or one that requires transferor to return specific assets
   IF criteria is met receivable is removed from transferor books and gain or loss on sale of receivable is recorded
   IF criteria NOT met situation where transferor is borrowing funds and using receivable as collateral-receivable NOT removed from books it is recoded as liability to borrowing transaction and interest expense is recorded instead of gain/loss

Question 13

With/Without Recourse

Answer 13

With: Transferor pays on part of maker if maker defaults
Without: Transferor does NOT pay on park of maker if maker defaults-typically these are accounted for as sales

Question 14

Notification/Non-notification basis

Answer 14

Notification Basis: Maker of receivable is notified and usually instructed to send payments to third party
Non-notification: Maker is not informed and continues to make pmts to original creditor

Question 15

Criteria for transfer receivable classification under IFRS

Answer 15

1. Entity transfers substantially all risks & rewards of ownership–sale
2. Entity retains substantially all risk & reward of ownership-secured borrowing
3. Neither 1 or 2, entity accts for transaction as sale if has transferred control & secured borrowing if has retained control

Question 16

Factoring W/O recourse

Answer 16

Usually accounted for as a sale, transferee bears cost of uncollectible accts, but transeror (seller) bears cost of sales adjustments-ex. sales discounts and returns

Question 17

Factoring W/ recourse

Answer 17

Must meet 3 criteria to determine if sale or loan. Transferor bears cost of bad debts as well as cost of sales adjustments.