Term
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Definition
| the most liquid of assets, is the standard medium of exchanges and the basis for measuring and accounting for all other items |
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Term
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Definition
short-term, highly liquid investments that are both a)readily convertible to known amounts of cash, and b)so near their maturity that they present insignificant risk of changes in interest rates
ex) treasury bills, commercial paper, and money market funds |
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Term
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Definition
| are claims held against customers and others for money, goods, or services |
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Term
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Definition
| customers often owe a company amounts for goods bought or services rendered |
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Term
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Definition
| are oral promises of the purchaser to pay for goods and services sold |
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Term
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Definition
| are written promises to pay a certain sum of money on a specified future date; they may arise from sales, financing, or other transactions |
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Term
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Definition
| advances to officers and employees; advances to subsidiaries; deposits paid to cover potential damages or losses; deposits paid as a guarantee of performance or payment; dividends and interest receivable; claims against insurance companies for casualties sustained, defendants under suit, governmental bodies for tax refunds, common carriers for damaged or lost goods, customers for returnable items |
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Term
| 2 factors that may complicate measurement of the exchange price |
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Definition
| 1) the availability of discounts (trade and cash discounts), 2)the length of time between the sale and the due date of payments (interest element) |
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Term
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Definition
| No entry is made until a specific account has definitely been established as uncollectible. Then the loss is recorded by crediting Accounts receivable and debiting Bad Debt Expense; this method is NOT GAAP |
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Term
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Definition
| an estimate is made of the expected uncollectible accounts from all sales made on account or from the total of outstanding receivables. This estimate is entered as an expense and an indirect reduction in accounts receivable (via an increase in the allowance account) in the period in which the sale is recorded; this is GAAP |
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Term
| percentage-of-sales approach |
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Definition
matches costs with revenues because it relates the charge to the period in which a company records the sale; achieves a proper matching of cost and revenues; income statement approach
Ex: D/A= $10,000 credit before AJE @12/31
A/R= $500,000
credit sales= $10,000,000
estimate 1% of credit sales will be uncollectible
10,000,000 x .01= $100,000
AJE[Bad debt exp. $100,000
[D/A $100,000 |
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Term
| percentage-of-receivables approach |
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Definition
companies may apply this method using one composite rate that reflects an estimate of the uncollectible receivables. Or, companies may set up an aging schedule of accounts receivable, which applies a different percentage based on past experience to the various age categories; balance sheet approach; results in a more accurate valuation of receivables on the balance sheet
Ex:A/R= $500,000
D/A= $10,000 credit before AJE
10% of A/R balance will be uncollectible
500,000 X .10= $50,000
AJE[Bad debt exp $40,000
[D/A $40,000
$5,000 become collectible
[A/R $5,000
[D/A $5,000
[Cash $5,000
[A/R $5,000 |
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Term
Cash Discounts (Sales Discounts)
Gross and Net method |
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Definition
Ex: Sell $50,000 of goods; terms 3/15, n/30 on 1/1
Gross Method
1/1 [A/R $50,000
[Sales $50,000
1/10[Cash $48,500
[Sales discounts$1,500
[A/R $50,000
Net Method
1/1[A/R $48,500
[sales $48,500
1/10[Cash $48,500
[A/R $48,500
After discount period:
Gross method
1/30[Cash $50,000
[A/R $50,000
Net method
1/30[Cash $50,000
[A/R $48,500
[sales Discounts forfeited $1,500 |
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Term
| Issues in accounting for accounts and notes receivable |
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Definition
| recognition, valuation, and disposition |
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Term
| unrealized holding gain or loss |
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Definition
| is the net change in the fair value of the receivable from one period to another, exclusive of interest revenue recognized but not recorded. As a result, the company reports the receivable at fair value each reporting date. In addition, it reports the change in value as part of net income |
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Term
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Definition
| a note receivable is considered impaired when it is probable that the creditor will be unable to collect all amounts due (both principal and interest) according to the contractual terms of the receivable |
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Term
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Definition
| some purchasers of receivables buy them to obtain the legal protection of ownership rights afforded a purchaser of assets versus the lesser rights afforded a secured creditor |
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Term
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Definition
Mills provides $700,000 of its accounts receivable to Citizens Bank as collateral for a $500,000 note. Citizens bank assesses a finance charge of 1% of the accounts receivable and interest on the note of 12%
Transfer of A/R and issuance of note:
Mills
[Cash $493,000
[Finance charge $7,000
[Notes Payable $500,000
Citizens Bank
[Notes receivable $500,000
[Finance Revenue $7,000
[Cash $493,000
Record as secured borrowing:
- record liability
- record interest expense
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Term
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Definition
- factors are finance companies or banks that buy receivables from businesses for a fee and then collect the remittances directly from the customers; factoring usually involves sale to only one company, fees are high, the quality of receivables is low, and the seller afterward does not service the receivables
- securitization takes a pool of assets such as credit card receivables, mortgage receivables, or car loan receivables, and sells shares in these pools of interest and principal payments; in a securitization, many investors are involved, margins are tight, the receivables are of generally higher quality, and the seller usually continues to service the receivables
Is there continuing involvement?
yes: use financial components approach:
- reduce receivables
- recognize assets obtained and liabilities incurred
- record gain or loss
No:
- record receivables
- record gain or loss
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Term
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Definition
- the purchaser assumes the risk of collectibility and absorbs any credit losses
- is an outright sale of the receivables both in form (transfer of title) and substance (transfer of control)
- generate CFs quickly, high risk of nonpayment
EX: sell $100,000 of receivables to a factor
factor-finance charge= 1%
make a deposit= 2%
[Cash $97,000
[Finance charge $1,000
[Due from factor $2,000
[Accounts (notes) receivable $100,000
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Term
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Definition
- seller guarantees payment to the purchaser in the even the debtor fails to pay; seller retains risk
EX:recourse liability determined=$10,000
[Cash $97,000
[Finance Charge $11,000
[Due from factor $2,000
[A/R $100,000
[Recourse liability$10,000
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Term
| 3 conditions met before company can record a sale |
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Definition
- transferred asset has been isolated from the transferor (put beyond reach of the transferor and its creditors)
- transferees have obtained the right to pledge or exchange either the transferred assets or beneficial interests in the transferred assets
- transferor does not maintain effective control over the transferred assets through an agreement to repurchase or redeem them before their maturity
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Term
| receivables turnover ratio |
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Definition
- measures the number of times, on average, a company collects receivables during the period
A/R turnover=Net sales/avg trade receivables (net)
- this shows how successful the company is in collecting its outstanding receivables
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Term
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Definition
schedule explaining any differences between the bank's and the company's records of cash
bank balance xx
deduct: o/s checks xx
add: deposits in transit xx
adj balance x
book balance xx
deduct:service charge xx
deduct:NSF check xx
add:note collection xx
errors xx
adj balance xx
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Term
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Definition
| end-of-month deposits of cash recorded on the depositor's book in one month are received and recorded by the bank in the following month |
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Term
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Definition
| checks written by the depositor are recorded when written but may not be recorded by (may not "clear) the bank until the next month |
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Term
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Definition
| charges recorded by the bank against the depositor's balance for such items as bank services, printing checks, not-sufficient-funds (NSF) checks, and safe-deposit box rentals. The depositor may not be aware of these charges until the receipt of the bank statement |
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Term
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Definition
| collections or deposits by the bank for the benefit of the depositor that may be unknown to the depositor until receipt of the bank statement. Examples are note collection for the depositor and interest earned on interest-bearing checking accounts |
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Term
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Definition
| errors on either the part of the bank or the part of the depositor cause the bank balance to disagree with the depositor's book balance |
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