Module 12 Flashcards
What is Cash?
Cash includes both cash (cash on hand, and demand deposits) and cash equivalents (short-term, highly liquid investments).
What are Cash Equivalents?
readily convertible into cash, and so near maturity that they carry little risk of changing value due to interest rate changes. (Generally this will ionly include investments with original maturities of three months or les from date of purchase).
What cash items should be disclosed seperatly?
Cash restricted as to its used should be disclosed separately, but not as a current asset. Also cash set aside for special use.
What is a bank reconcilation?
A reconcilation of the bank depositsnk. (per Book) to the Bank Statement as prepared by the Bank.
What is an example of a reconciling item for which adjustments on the books are not needed?
Outstanding Checks, Deposits in transit, or Bank errors.
What is an Example of a reconciling item for which adjusting entries would need to be made?
Unrecorded returned Checks (NSF), unrecorded bank charges, Errors in the cash account, and unrecorded bank collections of notes receivable
What are the 2 types of Bank Statements?
Simple Bank Statement, and 4 column cash reconcilation (Proof of Cash).
What is the basic bank statement (Part 1)?
Bal per bank statement +- (Deposits in transit, outstanding checks, bank error) = Correct Cash Balance
What is the basic bank statement (Part 2)?
Bal per Books +- (Service charges, note collected by bank, NSF Checks, Bank Errors) = Correct Cash Balance . These items will need adjustments made
4 column bank statement.
Not able to write out - see pg 295
How are Receivables presented on the Balance Sheet?
readily convertible into cash, and so near maturity that they carry little risk of changing value due to interest rate changes. (Generally this will ionly include investments with original maturities of three months or les from date of purchase).
Sales Discounts are treated as:
They are typically expensed when cash payment is received within the discount period.
How ae sales discounts accounted for on the sales at net method
Sale (Dr. AR CR. Cash). Cash Receipt during discount perod (Dr.Cash Cr. AR) Cash receipt after discount (dr. Cash. Dr. AR Dr. Discount not taken (expense))
How are sales discounts treated under the Gross Method?
Sale (Dr. AR Cr. Cash) Cash receipt during discount (Dr. Cash. Dr. Sales Disc. Cr. AR) Cash receipt after discount (Dr. Cash Cr. AR)
What is the rational for using the net method of Sales Discounts?
Sales are recorded at the cash equivalent amounts and receivables nearer relizable value.
What are the 2 approaches for Bad Debt Expense?
Direct Write-off method, Allowance Method
What is the Direct Write-off Method?
Bad debts are expensed in the period in which they are written off (IT IS NOT GAAP)
What is the allowance method of Bad Debt Expense?
Seeks to estimate the amount of uncollectable receivables and established a contra valuation account for the amount of the estimated uncollectible
What is the entry to set-up a bad debt allowance
Dr. Bad Debt Expense. Cr. Allowance for Bad debt
What is the entry to write-off bad debt?
Dr. Allowance for Bad Debt. Cr. AR
What are the 2 methods to determine the annual charge to bad debt expense?
Annual Sales and Year End AR
What is the rational for using the annual sales method to estimate bad debt expense?
rational is that bad debts are a function of sales (emphasizes income statement) % of annual sales. (Amount in allowance just grows from year to year)
What is the rational for using the Year end AR method to estimate bad debt expense?
rational that AR is a function of Bad debt (emphasizes balance Sheet) % is applied based on percentage of AR by their class (30+, 60+ etc) You take out the current bad debt expense in determining the amount to book this year.
Do net receivables change when a specific account is written off?
No, because AR an the allowance account are reduced by the same amount.
What are some examples of “Transfers and servicing of Financial Assets”?
Securitizations, Factoring, transfering of receivables with recourse, repurchase agreements, loan participations, bankers Acceptances
What is securitizations?
Purchasing and sellings securities that are collaterized by a pool of assets, such as a group of receivables
What is Factoring?
Selling receivables at a discount, to obtain immediate cash
What is transfering of receivables with recourse?
Selling receivables ata discount to obtain immediate cash but retaining the risk of loss if the customer does not pay the amount owed.
What is repurchase agreements?
An agreement to sell an asset to a lender and later reopurchase the asset. These agreements are in effect using the asset as collateral for a loan.
What are loan participations?
A situation where a group of financial institutions (called participating interest holders) purchase a share of financial instruments.
What is a Banker’s acceptances
An order from a customer of a bank for the payment of a specified sum of money (post-dated check) that may be bought and sold.
Note: We are attempting to find out if we have a sale of the asset, or a securied loan with the asset acting as collateral.
Note
What are the conditions that ALL must exist for a transfer of financial assets to be treated as a sale
1) Transferor must surrender control. 2) transferred assets are isolated and behond the reach of the transferror and its creditors. 3) the Transferee can pledge or exchange the asset without unresonable constraints. 4) The transferror does not maintain control over the transferred assets
When does the entity recongnize the assets it is receiving or giving up
After the transaction has occurred.
How are proceeds treated in a sale of financial instruments?
Assets (that are not interest) are part of the proceeds from the sale. Liabilities are treated as a reduction in the proceeds from the sale.
What are the two methods of factoring receivables?
With Recourse - Without Recourse
What is the JE to Factoring without recourse?
Dr Cash. Dr. Interest Expense. Dr. Factoring Fee. CR. A/R
Do you take AR off the Balance sheet in Factoring without recourse?
Yes.
What are the caracteristics of Factoring with Recourse?
The Transferor bears the risk of non-payment, not the factor. Must still keep a bad debt allowance.
Do you take AR off the Balance Sheet in Factoring with Recourse?
Yes, but you do keep a bad debt allowance
What is the JE to factoring with recourse?
Dr. Cash. Dr. Factors holdback receivable. Dr. Loss on sale of receivables. Cr. AR. Cr. Recourse Obligation
What is an assignment of AR?
It is a financial arrangement whereby the owner of the receivables obtains a loan by pledging the AR as collateral
T/F is you transfer financial assets, do you add assets received on the balance sheet at cost?
False, the transferee and transferor will measure them at fair Value
What are current Liabilities?
Obligatons whose liquidation is resonably expected to require the use of existing resources properly classified as current assets, or the creation of other current liabilities.
What are some examples of Current Liabilities?
AP, Loan Obligations, dividends payable, accrued liabilities, short-term oblitations that are not expected to be refinanced
When can you classify a short term obligation as a non-current obligation?
When you have both the intent an ability to refinance that obligation long-term
What is the acid-test (Quick) Ratio?
(Cash, Net Receivables, Marketable Securities) / Current Liabilities
What is a contingencie?
an Obligation
What is the current ratio?
Current assets / current liabilities
What is the receivable turnover ratio? and what does it measure?
It measures how quickly you collect cash from credit sales and it is calculated by taking the net credit sales / average net sales
What is the # of days’ sales in average receivables
it is the Average lenth of time receivables are outstanding. it is 365 / receivable turnover
If no estimate is available in a loss contingency that is reasonably possible to pay, What do you disclose on the loss?
You would record the loss at the best estimate of the loss, or if no amount can be determined the lower number in the range
