Term
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Definition
| Any asset that is intended to be converted into cash within one year or the company’s operating cycle, whichever is longer |
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Term
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Definition
| The time required for a company to go through all of the required phases of the production and sales process |
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Term
| What accounts are included in current assets? |
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Definition
| o Cash, short-term investments, short-term accounts and notes receivable, inventories, and prepaid expenses |
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Term
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Definition
| Current Assets minus current liabilities |
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Term
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Definition
| = current assets / current liabilities |
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Term
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Definition
| (cash + Short investments + short receivables) / current liabilities |
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Term
| What does working capital indicate? |
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Definition
| Whether a company has enough current assets to support its sales volume |
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Term
| If a company does not keep a certain debt covenant, what can the creditor do? |
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Definition
| Call for the immediate payment of the entire loan principal |
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Term
| What is the main limitation of working capital, current ratio and quick ratio |
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Definition
| The fundamental fact that current assets and current liabilities fail to accurately reflect future cash inflows and outflows |
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Term
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Definition
| Choosing accounting methods or making operating decisions designed solely to make the financial statements appear more attractive |
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Term
| Which financial statement are investors beginning to rely on more heavily? |
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Definition
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Term
| What does the cash account consist of? |
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Definition
| coin, currency, and checking accounts, as well as money orders, certified checks, cashiers checks, personal checks, and bank drafts received by a company |
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Term
| 3 issues concerning cash that are important to managers |
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Definition
| (1) restrictions on the use of cash, (2) proper management of cash, and (3) control of cash |
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Term
| Who imposes restrictions on cash? |
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Definition
| Creditors to help ensure future interest and principal payments |
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Term
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Definition
| Cash is controlled by a trustee (third party) until the debtor’s existing liability is discharged |
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Term
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Definition
| Minimum required cash balances be maintained on deposit in the accounts of customers to whom they lend money or extend credit |
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Term
| 2 aspect of the control of cash |
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Definition
| (1) record control and (2) physical control |
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Term
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Definition
| The procedures designed to ensure that the cash account on the balance sheet reflects the actual amount of cash in the company’s possession |
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Term
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Definition
| The procedures designed to safeguard cash from loss or theft |
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Term
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Definition
| Arise from selling goods or services to customers who do not immediately pay cash |
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Term
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Definition
| Credit trade agreements which represent short-term extensions of credit normally collected within 30 to 60 days |
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Term
| When do accounts receivable appear on the balance sheet |
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Definition
| During the time between revenue recognition and the receipt of the related cash payment |
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Term
| Net Realizable Value for A/R |
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Definition
| Face Value – Adjustments for (1) Cash discounts, (2) Bad debts, and (3) Sales returns |
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Term
| Benefits associated with cash discounts for those who pay within a specific period of time |
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Definition
| Collected cash can earn a return and eliminating receivables quickly reduces the costs of maintaining records for collecting outstanding receivables |
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Term
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Definition
| A reduction in the per-unit price of an item if a certain quantity is purchased |
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Term
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Definition
| A common trade discount and is a sales price reduction due to decreased demand |
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Term
| Two ways to account for cash discounts |
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Definition
| gross method and net method |
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Term
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Definition
Records the transaction at the original value (assuming the buyer will not receive the discount)
• If the buyer pays within the period for a discount, a cash discount account appears on the income statement (serves as a contra account to the credit balance in the sales account) which gives rise to an income statement number called net sales |
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Term
| How can companies monitor collection of debts |
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Definition
| create and maintain collection departments, hire collection agencies, and pursue legal proceedings to control bad debts |
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Term
| 2 basic adjustments for bad debts |
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Definition
| (1) an adjustment to reduce the value of accounts receivable and (2) an adjustment to reduce net income |
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Term
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Definition
Used to account for bad debts
1. The dollar amount of bad debts is estimated at the end of the accounting period
2. An adjusting journal entry, which recognizes a bad debt expense on the income statement and reduces the net balance in accounts receivable (and is recorded in the books)
3. A write-off journal entry is recorded when a bad debt naturally occurs |
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Term
| Percentage-of-credit-sales approach |
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Definition
The most common method of estimating bad debts
• This method simply multiplies a percentage by the total credit sales for the year – based primarily on past experience |
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Term
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Definition
| A method which categorizes individual accounts in terms of length of time each has been outstanding and applies a different bad debt rate to each category |
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Term
| Details of Aging Schedules |
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Definition
o Can identify slow-moving accounts, thus directing collection efforts and defining maximum costs that should be incurred by those efforts
o Can be helpful in estimating how much money a company is losing in potential interest charges (useful in deciding whether to offer cash discounts)
o However, these can be costly to establish and maintain |
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Term
| How to account for sales returns |
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Definition
• At the end of each period, an estimate of expected sales returns is made which, in turn, determines the dollar value of an adjusting journal entry that reduces income and establishes an allowance account
• The account is disclosed on the balance sheet as a contra to accounts receivable – actual returns are debited against the allowance and credited against accounts receivable |
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Term
| 2 general questions that are of significant economic importance regarding short-term receivables |
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Definition
o When should a receivable be recorded in the books?
o At what dollar amount should a receivable be valued on the balance sheet? |
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Term
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Definition
| A strategy used by management to reduce the risk of associated with holding receivables in foreign currencies (hold equal amount of payables in that currency) |
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