Receivables Flashcards
List the items that are not included in cash.
COD
Legally restricted compensating balances
Restricted cash funds
Postdated checks received
Checks written but not sent
Advances to employees
Postage stampsWhat does separation of duties accomplish?
Separation of duties makes it more difficult for employees to perpetrate fraud and gain access to the firm’s cash.
Define “monetary assets.”
An asset with fixed nominal val
Define “compensating balance.”
A minimum balance that must be maintained by the firm in relation to a borrowing. It is classified as current or noncurrent based on the related loan classification.
Define “cash equivalents.
Treasury obligations (bills, notes, and bonds)
Commercial paper (very short‐term corporate notes)
Money market fundsWhat effect do overdrafts have in International Financial Reporting Standards (IFRS)?
They can be subtracted from cash rather than classified as a liability.
Describe bank overdraft rules.
Overdrafts can be offset against cash in the same bank, but if the bank has insufficient cash at the same bank, the overdrafts are reported as a current liability.
List the items included in cash.
Coin and currency
Petty cash
Cash in bank
Negotiable instruments, such as ordinary checks, cashier’s checks, certified checks, and money orders
What does cash on hand reflect?
Petty cash on hand and undeposited cash receipts
List the adjustments made to a bank balance to arrive at book income.
Deposits in transit
Cash on hand (deposited cash receipts, not petty cash)
Outstanding checks
Bank errors
What is a deposit in transit?
Deposits made by a company that have not cleared the bank as of the bank statement date
List the adjustments made to book balance to arrive at the bank balance.
Interest earned
Note collected
Service charges
Nonsufficient funds (NSF) checks
Errors in company's recordsWhat does an NSF check represent?
“Nonsufficient funds” checks received from customers
List the three types of bank reconciliations.
Bank to book
Book to bank
Bank and book to true
What are outstanding checks?
Checks written and mailed by the company that have not cleared the bank by the bank statement date
What factors affect receivable valuation?
Trade discounts
Sales discounts
Sales returns and allowances
Uncollectible accounts
List the characteristics of notes receivables.
Typically they are noncustomer transactions.
They have a longer time frame.
They have an interest element.
What other name is used for customer accounts receivable?
Trade receivable
What is the measurement attribute of accounts receivable?
Net realizable value
List the characteristics of accounts receivables
Typically they are related to customer contracts.
They have a short time frame.
Typically they have no interest element.
How are receivables accounted for using the gross method?
Receivables are recorded at gross invoice price (before cash discount)
List the two methods of accounting for accounts receivables.
Gross
Net
Do International Financial Reporting Standards (IFRS) permit recognition of accounts receivable when there is a firm sales commitment?
Yes, in some instances when the recognition criteria have been met.
Define “contra to sales.”
Sales discounts
Are notes receivable typically related to customer transactions?
No, they are not typically related.
What is the preferred method of accounting for uncollectible accounts receivable?
Allowance method
Describe the allowance method of accounting for bad debts.
Determine the amount uncollectible and provide an allowance to measure accounts receivable at net realizable value.
Describe the direct write‐off method for bad debts.
The direct write‐off method records bad debt expense only when a specific account receivable is considered uncollectible and is written off. The direct write‐off method is rarely used.
Which method of accounting for uncollectible accounts receivable is required if uncollectible accounts are probable and estimable?
Allowance method
What purpose does analyzing ending accounts receivable serve?
It enables the auditor to determine the needed or desired balance in the allowance account.
Describe the balance sheet approach for calculating an allowance balance.
It a percentage to ending accounts receivable.
Describe the income statement approach for bad debts.
It estimates bad debt expense as a percentage of credit sales.
Define “market rate.”
Interest rate used to determine the present value of a note receivable.
Describe the difference between an interest‐bearing and a noninterest‐bearing note receivable.
Interest‐bearing note: The amount of cash to be collected from an interest‐bearing note is the face amount of the note plus interest.
Noninterest‐bearing note: The face amount of the note includes principal and interest that will be collected at maturity date.
What do we call the (1) maker and (2) holder of a note?
The maker is the buyer or borrower.
The holder is the seller or lender.
How is the present value in a noncash transaction determined?
The fair market value of the noncash asset or of the note receivable, whichever is more readily determinable
How is the present value in a cash transaction determined?
The amount of cash that exchanged hands
At what value should a note receivable be recorded?
The present value of all future cash flows
In the transfer of receivables, if the three conditions for a sale are not met, what happens?
The receivable remains on the books of the transferor, and the transferor records a liability related to the borrowing transaction.
Define “maker.”
A debtor who has borrowed funds or purchased an asset and provided a note to the original creditor.
What is the International Financial Reporting Standards (IFRS) focus regarding sales or secure borrowing?
Whether the transferor has transferred the rights to receive the cash flows from the receivable and whether substantially all the risk and rewards of ownership were transferred
Describe a transaction with recourse.
The transferor is responsible for nonpayment on the part of the original maker of the receivable.
Describe a transaction without recourse.
The transferor is not responsible for nonpayment on the part of the maker of the receivable.
With respect to the transfer of receivable, what are the three conditions of a sale?
The transferred assets have been isolated from the transferor, even in bankruptcy.
The transferee is free to pledge or exchange the assets.
The transferor does not maintain effective control over the transferred assets through either an agreement that allows and requires the transferor to repurchase the assets or one that requires the transferor to return specific assets.
What is the accounting treatment when factoring with recourse, as accounted for as a sale?
The entries are similar to factoring without recourse except that the transferor must estimate and record a recourse liability.
Who bears the cost of bad debts when factoring without recourse?
The factor (transferee) bears the cost of uncollectible accounts, but the seller (transferor) bears the cost of sales adjustments.
What is the accounting treatment when factoring with recourse, as accounted for as a loan?
The transferor maintains the receivables on its books and records a loan and interest expense over the term of the agreement.
Who bears the costs of bad debts when factoring with recourse?
The seller (transferor) bears the cost of bad debts as well as the cost of sales adjustments.
Define “factoring.”
The transferor (original creditor) transfers the receivables to a factor (transferee, a financial institution) immediately as a normal part of business.
When does loan impairment occur?
When the creditor believes the loan payments actually to be received have a lower fair value than under the original agreement.
How is the loss on impairment accomplished?
With a debit to bad debt expense and a credit to a contra‐receivable account
When a receivable is impaired, what should it be written down to?
The present value of the future cash flows expected to be collected using the original effective interest rate for the loan or market value if more determinable.
What is the accounting treatment for loan impairments?
The receivable should be written down to:
Present value of future cash flows using original effective interest rate, or Market value, if this value can be determined.
List the methods through which interest revenue is recognized after a write‐down has occurred.
Interest
Cost recovery methods
