ACCT301 Test 2 Ch 7 Cash & Receivables

2 problems in accounting for cash transactions

(1) establish proper controls to prevent unauthorized transactions by officers or employees (2) provide information to properly manage cash on hand and cash transactions ^to solve these, companies need *internal control* over cash (SOX act had a section on this)

bank reconciliation form

-*Balance per bank statement (end of pd)* -Add: Deposits in Transit Undeposited receipts (cash on hand) Bank errors that understate bank statement balance -Deduct: outstanding checks Bank errors that overstate bank statement balance -Correct Cash balance -*Balance per depositor's books* Add: Bank credits and collections not yet recorded in the book balance Book errors that understate book balance -Deduct: Bank charges not yet recorded in the books Book errors that overstate book balance -Correct Cash Balance Adjusting entries required to adjust and correct are taken from items in Balance per Books section

analysis of receivables

-*accounts receivable turnover*: used to assess liquidity of receivables

accounts receivable turnover

-*net sales/avg ~net~ accounts receivable outstanding during the year ([beg. + end. - collected Accounts Receivable]/2)* -measures # of times a company on average collects receivables during the period -will be valid if relative amounts of credit and cash sales remain fairly constant -*often transformed to days to collect accounts receivable or days outstanding* -- avg collection period shouldn't exceed term period -shows how successful company is in collecting outstanding receivables -aging schedule should be made if possible to determine how long receivables have been outstanding (if successful: some receivables will be collected quickly, others not so much)

imprest system for petty cash

-A method of control for disbursements of petty cash. 1.The company establishes a petty cash fund, controlled by the petty cash custodian, who pays out cash from the fund for amounts up to a certain pre-set limit. Records transfer of funds to petty cash as: Entry: Petty Cash $100 Cash 100 2. When the cash in the fund runs low, the custodian presents a request for reimbursement of the fund, supported by receipts as evidence of fund disbursement. 3. Petty cash transactions are recorded in the accounting records when the fund is established and when it is replenished, but not in the interim. Companies use the account *Cash Over and Short* to record any errors that occur in the petty cash fund. 4. To lower amount in petty cash: Cash 50 Petty Cash 50

without recourse

-A receivables-factoring transaction in which the purchaser assumes the risk of collectibility and absorbs any credit losses. The transfer of receivables in such a transaction is an outright sale of the receivables both in form (transfer of title) and substance (transfer of control).

nontrade receivables

-Claims that arise from a variety of non-sales transactions. Examples include: advances to officers and employees or to subsidiaries; dividends and interest receivable; deposits paid to cover potential damages or losses or as a guarantee of performance or payment; and claims against insurance companies for casualties sustained, defendants under suit, governmental bodies for tax refunds, common carriers for damaged or lost goods, creditors for returned, damaged, or lost goods, and customers for returnable items.

sale without recourse example

-Crest textiles factors $500,000 accounts receivable with Com Factors Inc w/o recourse. Com Factors assesses *finance charge (interest) of 3%* and *retains 5%* of accounts receivable for probable adjustments on receivables. -Crest textiles records: Cash $460,000 Due from Factor $25,000 (5% x $500,000) Loss Sale of Receivables $15,000 (3% x $500,000) Accounts (Notes) Receivable $500,000 -Com Factors Inc Accounts (Notes) Receivable $500,000 Due to Customer (Crest) $25,000 Interest Revenue $15,000 Cash $460,000 -to recognize sale of receivables, Crest records a loss of $15,000. -factor's net income will be the difference between financing revenue of $15,000 and amount of any uncollectible receivables

computing sale w recourse

-Crest textiles: Cash received $460,000 Due from factor 25,000 -> $485,000 Less: Recourse Liability 6,000 Net proceeds -> $479,000 -Crest's loss is: Carrying (book) value $500,000 Net proceeds 479,000 Loss on sale of receivables: 21,000

receivables balance sheet

-Current Assets Cash & cash equivalents Less Allowance for Doubtful Accounts -Advances Fed income taxes refundable Dividends, interest receivable Other receivables Total Current Assets Noncurrent receivables (>5 yrs)

sale

-FASB: "only occurs when seller surrenders control of receivables to the buyer" -3 conditions must be met for *sale to occur*: 1. transferred asset *isolated* from transferor 2. transferees have the right to *pledge or exchange* either transferred assets or beneficial interests in transferred assets 3. transferor *doesn't maintain effective control* over transferred assets by agreement to repurchase them or redeem them before maturity ^if these don't happen, transferor should record transfer as *secured borrowing*

trade discounts

-Reductions in sales prices, which companies use to avoid frequent changes in catalogs, to alter prices for different quantities purchased, or to hide the true invoice price from competitors. Trade discounts are commonly quoted in percentages.

fair value option

-The choice allowed by the FASB to use fair value in the financial statements as the basis of measurement for financial assets and liabilities. -*Under the fair value option, the item is recorded at fair value at each reporting date, and unrealized holding gains or losses are reported as part of net income* -can be initially implemented when the financial instrument is recognized or when some event triggers new accounting basis (like a business acquisition) -MUST be used until the company no longer owns the instrument -cannot be implemented after the company's already valued the instrument some other way first (like carrying value measurement)

net realizable value (receivables)

-The net amount that companies expect to receive in cash for *short-term receivables = face amount less all necessary allowances.* -Companies estimate both *uncollectible receivables* and any *returns or allowances* to be granted in order to determine net realizable value, which they report in the financial statements

notes receivable

-Written promises to pay a certain sum of money on a specified future date. -may arise from sales, financing, or other transactions and may be short-term or long-term -long-term ones *recorded & collected at present value* -short-term notes receivable reported at NRV

GAAP & IFRS similarities in reporting cash & receivables

-accounting and reporting related to cash, cash equivalents is essentially the same under GAAP & IFRS -*cash and receivables normally reported in current assets section of statement of financial position under IFRS* -both have allowance for uncollectible accounts for trade receivables, reported at NRV -both require that loans and receivables be accounted at amortized cost, adjusted for allowances for doubtful accounts (IFRS: allowances = "*provisions*" -IFRS entry to record allowance: Bad Debt Expense xxxxx Provision for Doubtful Accounts xxxxx -accounting for loan impairments similar: IFRS: loss reversed either directly, with debit to Accounts Receivable, or by debiting allowance account and crediting Bad Debt Expense. -these impairment loss reversals aren't allowed under GAAP: debit loss to Bad Debt Expense and credit to Allowance for Doubtful Accounts (ADA = contra-asset account) ^switch above to record impairment (even if payment exceeds impairment); *reversal of impairment isn't permitted under GAAP--balance of the loan after the impairment becomes basis for new loan*

noncurrent asset

-aka long-term/intangible asset -unlikely to turn to unrestricted cash within 1 yr of balance sheet

transaction price

-amount of consideration a company expects to receive from a customer in exchange for transferring goods or services -sometimes transaction price = exact price of item (like yoga pants)...other times companies must consider items like variable consideration, time value of money, noncash consideration, consideration paid/payable to customer that'll affect price

entry to record receipt of annual interest and discount amortization for yr 1

-annual interest payments of $1,000: Cash 1,000 Discount on Notes Receivable 1,142 Interest Revenue 1,142 Carrying amount (amount going towards $10,000 face value instead of towards interest) = PV of principal + amount amortized

cash

-asset most susceptible to improper diversion, use -Consists of coin, currency, and available funds on deposit at the bank, as well as negotiable instruments such as money orders, certified checks, cashier's checks, personal checks, and bank drafts. Cash, the most liquid of assets, is the standard medium of exchange and the basis for measuring all other items. Companies generally classify cash as a current asset.

accounts receivable

-asset: debit balance (credit to decrease) -*Oral* promises of the purchaser to pay for goods and services sold. They represent *short-term extensions of credit, which are normally collected within 30 to 60 days.* -differ from Notes receivable (which are written) -short-term notes receivable reported at *net realizable value*

record loss due to impairment on loan

-calculate loss due to impairment on loan (carrying amount - PV of resulting maturity value) -debit Bad Debt Expense, credit Accounts Receivable

cash over & short

-closed at end of year; reported on income statement as "Other expense or revenue"

cash over

-company debits overage to Cash Over and Short account

recovery of an uncollectible amount

-company makes 2 entries to record the recovery of a bad debt: 1. reverses the entry made in writing off the account, which reinstates the customer's account 2. journalizes the collection in the usual manner: Accounts receivable 1,000 Allowance for doubtful accounts 1,000 (To reverse write-off of account--exact reverse of write-off) Cash 1,000 Accounts Receivable 1,000 (Collection of account) -This allows the account to be stated in what is known as net realizable value, where: -*Net Realizable Value = Accounts Receivable - Allowance for Doubtful Accounts* -write-off & recovery of bad debt affects only balance sheet accounts -net effect of 2 above entries is debit to cash, credit to allowance for doubtful accounts

record receipt of note not issued at Face Value

-compute implicit interest rate (% difference bw FV and PV: Notes Receivable (FV) Discount on Notes Receivable (FV - PV) Cash (FV - Discount on Notes Receivable)

Allowance for doubtful accounts

-contra-asset account (credit balance - so to decrease, debit it) that isn't closed at the end of the fiscal year -used instead of direct credit to accounts receivable bc they don't know which customers won't pay -shows the *estimated* amount of claims on customers that the company expects it won't collect in the future -one way of estimating = *percentage-of-receivables approach* -When the credit balance of the Allowance for Doubtful Accounts is subtracted from the debit balance in Accounts Receivable the result is known as the net realizable value of the Accounts Receivable. -The credit balance in this account comes from the entry wherein Bad Debts Expense is debited. -a reduction of the total amount of accounts receivable appearing on a company's balance sheet, and is listed as a deduction immediately below the accounts receivable line item. This deduction is classified as a contra asset account.

allowance for doubtful accounts

-contra-asset account (credit balance) -primary notes receivable allowance account

allowance for sales returns and allowances

-contra-asset account (credit balance) to accounts receivable and offsets accounts receivable on the balance sheet -journal entry: decrease $$ by its specific amount Sales Returns and Allowances 100 Allowance for Sales Returns and Allowances 100

Sales returns and allowances

-contra-revenue account to Sales Revenue and offsets sales revenue on the income statement (DEBIT balance) -entry looks like this: Sales returns and allowances 300 Accounts receivable 300 -*adjusting entry to add value to sales returns and allowances debits sales returns and allowances but credits Allowance for Sales Returns and Allowances bc it doesn't know the exact amount of accounts receivable that will be subject to an allowance, and doesn't know which customers will receive an allowance -- allowance amount is for any write-offs that may occur in the future*

current ratio

-current assets / current liabilities -higher ratio = more liquidity

Recording the write-off amount

-debit *Allowance for doubtful accounts* (NOT BAD DEBT EXPENSE bc company has already recognized this amount as a bad debt expense when it made the adjusting entry for estimated bad debts) -credit accounts receivable (name of person who hasn't paid back the amount owed and probably won't) (write-off of this person's account) -*goes in balance sheet*

bad debt expense

-debited to record *estimated uncollectibles* -recorded in income statement as operating expense -deducts allowance for doubtful accounts from accounts receivable: Current Assets Cash x Accounts Receivable x Less: Allowance for doubtful accounts x *x* -the bold x is *net realizable value* of the accounts receivable at the statement date

collection float

-difference between the amount on deposit according to the company's records and the amount of collected cash according to the bank record -multiple collection centers generally reduce its size

Allowance method for collecting bad debts

-estimates uncollectible accounts at the end of each period -ensures that companies state receivables on the balance sheet at their net realizable value -when bad debts are material in amount: 1. companies estimate uncollectible accounts receivable and compare the new estimate to the current balance in the allowance account 2. companies debit estimated increases in uncollectibles to Bad Debt Expense and credit them to Allowance for Doubtful Accounts (contra asset account) thru adjusting entry at the end of each period 3. when companies write off a specific account, they debit actual uncollectibles to Allowance for Doubtful Accounts and credit that amount to Accounts Receivable

cash on delivery policy

-for people with questionable credit -sale of goods by mail order where payment is made on delivery rather than in advance. If the goods are not paid for, they are returned to the retailer.

how to find average net accounts receivable (equation)

-goes on bottom of Accounts Receivable turnover ratio -(beginning AR + ending AR - collections on AR)/2

installment account due

-has a fixed payment for a fixed period of time -if it's due to a company, it's that company's account receivable (asset)

sales of receivables

-have recently increased substantially -common type = sale to a *factor* (3rd party finance companies or banks that buy receivables from businesses for a fee and then collect remittances directly from customers)

Interest rate revenue

-ignored by company bc it's immaterial compared to net income -theoretically, any revenue after the period of sale is this

imputed interest rate

-interest rate determined for good or service when fair value cannot be determined and there's no ready market -determined at receipt of the note; subsequent interest rates don't count in interest rate imputation -covenants, collateral, payment schedule, existing prime interest rate, interest rates from issuers with similar credit ratings affect imputed interest rate

Net present value

-net amount the company expects to receive in cash -estimated using forecasts of future collectability

unrealized holding gain or loss

-net change in fair value of receivable from one period to another, *exclusive of interest revenue* -reported as part of net income if a company chooses fair value option in measuring & recording receivables --> company therefore reports receivable at fair value each reporting date & reports change in value as part of net income

net method

-net method assumes the retailer always takes advantage of the discounted cash price and records the purchased inventory at the discounted price: -to record sales of $10,000 within discount pd: Accts. Receivable 9,800 Sales Revenue 9,800 -to record payment on $4,000 of sales received within discount pd: Cash 3,920 Accts Receivable 3,920 -to record payment on $6,000 of sales received after discount pd: Cash 6,000 Accts Receivable 5,880 Sales Discounts Forfeited 120 -helps mgmt find potential problems w/ inferior merchandise, inefficiencies in filling orders, delivery or shipment mistakes

bank statement

-prepared end of each month -copy of bank's account with customer + customer's checks that the bank paid during the month -if there are no errors or unusual transactions, and all customer checks reached the bank in the same month, bank record = customer record ^usually doesn't happen bc: 1. deposits in transit (end of month deposits recorded in following month) 2. outstanding checks (may not be recorded by the bank till next month) 3. bank charges (bank service charges, printing checks, *not-sufficient-funds checks*, safe-deposit box rentals) maybe not known by depositor until bank statement 4. bank credits (may be unknown to depositor till receipt of bank statement: note collection and interest earned on interest-bearing checking accounts) 5. bank or depositor errors -requires bank reconciliation

variable consideration

-price of good or service depends on future events like price increases, volume discounts, rebates, credits, performance bonuses, royalties -company estimates amount of variable consideration it'll receive from contract to determine amount of revenue to recognize -choose between *expected value* (probability-weighted amount) & *most likely amount* (single most likely amount in a range of possible consideration outcomes)

general checking account

-principal bank account in most companies & frequently the only bank account in small businesses -company deposits and disburses cash from this account -company cycles all transactions thru it

measurement of collectibility

-record losses/gains at present value (debiting Bad Debt Expense for expected loss, credit Allowance for Doubtful Accounts) ^debtor makes no chance in however much he owns, bc that would be illegal excepts if he's allowed to negotiate a modification in the loan agreement -in the latter case, accounting entries are the same as the situation where the loan officer estimates future cash flows (except are more exact bc they're agreed upon legally)

Differences in GAAP, IFRS reporting of cash & receivables

-recording notes receivable, impairments DIFFERENT: IASB estimates uncollectible accounts over *shorter* time periods, compared to FASB model -IFRS: companies report cash and receivables as last items in current assets under IFRS; GAAP: items are reported in order of liquidity -IFRS segregates receivables with different characteristics and GAAP doesn't -IFRS has different approach to estimating uncollectible accounts on receivables w significant financing component--uncollectible accounts of long-term receivables w/o credit deterioration are estimated based on expected losses over next 12 months -fair value option similar but not identical: international standard related to fair value option has criteria not present in GAAP -IFRS: bank overdrafts reported as cash; GAAP: bank overdrafts reported as liabilities -IFRS: combination of approach focused on risks, rewards, loss of control used to account for transfers of receivables; GAAP uses loss of control as primary criterion -IFRS: permits partial transfers; GAAP doesn't

gross method

-records an invoice at full price without regard to any cash discounts offered. -records $10,000 sale during discount period as: Accounts Receivable $10,000 Sales Revenue $10,000 -records payment on $4,000 of sales received within discount pd as Cash $4,000 Sales Discounts $80 Accounts Receivable $3,920 -records $6,000 payment on sales after discount pd as: Cash $6,000 Sales Discounts $6,000 -if collection pds are relatively short, using either gross or net method results in same amounts of revenues and receivables equal to transaction price

-sale without recourse (nonrecourse)

-seller assumes no responsibility for any credit losses for receivable transfers--therefore, *transfer of accounts receivable without recourse is a SALE of the receivables in form (transfer of title) and substance (transfer of control)* -seller: 1.*debits cash for proceeds and credits Accounts Receivable for face value of the receivables* 2. recognizes difference, reduced by any provision for probable adjustments (discounts, returns, allowances, etc) as *Loss on Sale of Receivables* (like a finance charge on receipt of receivables) 3. uses *Due From Factor* account (reported as receivable) to account for proceeds retained by factor to cover probable sales discounts, sales, returns, sales allowances

sale with recourse

-seller guarantees payment to purchaser if debtor doesn't pay -seller uses *financial components approach* bc seller has continuing involvement with receivable

transfer of receivables

-sometimes companies accelerate the receipt of cash from receivables, the owner may transfer accounts or notes receivable to another company for cash bc they want to provide quick sales financing for customers, especially in durable goods industries -*holder* may sell receivables because money is tight and access to normal credit is unavailable/expensive/illegal -*happens in 2 ways: 1. sales of receivables 2. secured borrowing*

present value of note

-sum of present value of principal (use market rate for I/YR in calculating PV of principal) + PV of interest (PV of interest found by subctracting PV of note from FV of note) -subtract PV of note from FV of note to get the amount of discount

promissory note

-supports a note receivable -A written promise to pay a certain sum of money at a specific future date, in support of a note receivable. -negotiable instrument that *maker* signs in favor of designated *payee* who can sell or otherwise transfer the note to others -*interest-bearing notes* have interest - *zero-interest-bearing notes* do not -basic issues in accounting for notes receivable = those for accounts receivable: recognition, valuation, disposition

allowance

-under the __________ method, companies debit every bad debt write-off to the allowance account rather than to Bad Debt Expense because company has already registered the expense when it made the adjusting entry for estimated bad debts -may be applied using one *composite rate* that reflects estimate of uncollectible receivables -can also use an *aging schedule* which applies a different percentage based on past experience to various age categories

lockbox accounts

-used by large, multilocation companies to collect in cities with heavy customer billing -company rents local post office box and authorizes a local bank to pick up remittances mailed to the box number -bank empties box at least once a day and then credits company's account for collections -lockbox accelerates availability of & control over cash

imprest bank accounts

-used to make specific amount of cash available for limited purpose -acts as clearing account for large volume of checks/specific type of check -company transfers money from general checking account -used to disburse payroll checks, dividends, commissions, bonuses, confidential expenses, travel expenses

discount on notes receivable

-valuation account -reported on balance sheet as a contra asset account to notes receivable -recognize interest revenue annually using the *effective-interest method*: To record 1st yr of 3-yr, 9% interest payment on loan of PV = $7,721.80 and FV = $10,000: Discount on Notes Receivable 694.96 Interest Revenue (PV x interest rate) 694.96

Write-off amount

-what companies do when they've exhausted all means of collecting past-due account and collection appears impossible -only affects balance sheet accounts

Bank overdraft

-when a company writes a check for more than the amount in its cash account -*reported in the current liabilities section, adding to the accounts payable section* -if material, disclose the items separately in the balance sheet or in related notes -not offset against the cash account EXCEPT *when the same amount of cash is present in the same bank where the overdraft occurred. Then you must offset the overdraft amount against the cash account*

premium

-when present value exceeds face value, note is exchanged at a premium -record premium of note receivable as debit -amortize the note using effective-interest method over life of note as annual reductions in the amount of interest revenue recognized

note not issued at Face Value

-zero-interest-bearing notes: PV is cash paid to the issuer -for zero-interest-bearing notes: compute the *implicit interest rate* from the known PV and FV -discount PV from FV and amortize this amount to interest revenue over the life of the note

"terms 1%/10 net 30"

1% discount if paid in 10 days; otherwise entire amount is due in 30 days

rules to classify receivables

1. segregate receivable types of a company, if material 2. offset valuation accounts against proper receivables accounts 3. determine receivables in current assets section will be converted to cash within year or operating cycle (the longer) 4. disclose loss contingencies existing on receivables 5. disclose receivables designated/pledged as collateral 6. disclose nature of credit risk in receivables, how that risk arrives at allowance for credit losses and changes and reasons for changes in allowance for credit losses -sometimes required to distinguish on type of receivable (1) FASB guidelines: roll-forward schedule of allowance for doubtful accounts during period (2) nonaccrual (not generating its stated interest rate because of nonpayment from the borrower) status of receivables by class of receivables (3) impaired receivables by type of receivable -also disclose credit quality indicators -- credit risk shared by companies w/i same industry that might be facing economic hardship

to obtain additional control over petty cash fund

1. superior of the petty cash custodian makes surprise counts of the fund from time to time to determine that a satisfactory accounting of the fund has occurred 2. company cancels or mutilates petty cash receipts after they have been submitted for reimbursement so they can't be used to secure a 2nd reimbursement

days to collect accounts receivable (liquidity)

365 days /accounts receivable turnover ratio

not-sufficient-funds (NSF) checks

A charge recorded by a bank against a depositor's balance for a check written for more than the amount of funds in the depositor's account.

direct write-off method

A method for recording *uncollectible accounts receivable* by recording the bad debt in the period in which a company determines that it cannot collect a specific receivable. -used for tax purposes but is otherwise not usually considered appropriate because it usually does not result in the proper *carrying value* (original cost of an asset, less the accumulated amount of any depreciation or amortization, less the accumulated amount of any asset impairments) for accounts receivable and it fails to match costs with revenues of the period. -*doesn't result in receivables being stated at net realizable value on the balance sheet*

allowance method

A method for recording uncollectible accounts receivable by entering the expense on an estimated basis in the accounting period in which the sales on account occur. The allowance method records bad debt expense in the same period as the sale, thus properly matching expenses and revenues and achieving a proper carrying value for accounts receivable. The FASB considers the allowance method appropriate in situations where it is probable that an asset has been impaired and that the amount of the loss can be reasonably estimated. - -Steps: 1. companies estimate uncollectible accounts receivable and compare new estimate to current balance in allowance account 2. companies debit estimated increases in uncollectibles to Bad Debt Expense and credit them to Allowance for Doubtful Accounts (contra asset account: credit balance) 3. when companies write off specific accounts: Allowance for Doubtful Accounts

percentage-of-receivables approach

A method of determining bad debt expense, by simply reporting receivables in the balance sheet at net realizable value. Also referred to as the balance sheet approach. This approach gives a reasonably accurate estimate of the receivables' realizable value, but it does not match cost and revenues. Companies may apply this method using one composite rate that reflects an estimate of the uncollectible receivables, or they may set up an aging schedule for particular account categories.

percentage-of-sales approach

A method of determining bad debt expense, in which a company converts the relationship between previous years' credit sales and bad debts into a percentage and uses that percentage to determine the current year's bad debt expense. To use this method, there must be a fairly stable relationship between previous years' credit sales and bad debts. Because it relates the charge to the period in which a company records the sale, this method matches costs with revenues. Also referred to as the income statement approach.

zero-interest-bearing notes

A note receivable that includes interest as part of the face amount. Also called noninterest-bearing notes.

cash on order policy

A payment term whereby the buyer remits the money at the time the order is placed. Under this term, the buyer is actually extending credit to the seller. Also called payment in advance.

with recourse

A receivables-factoring transaction in which the seller guarantees payment to the purchaser if the debtor fails to pay. The seller records this transaction using a financial components approach, in which each party to the sale recognizes only the assets and liabilities that it controls after the sale. -to determine loss on sale of receivables: first determine *net proceeds* then subtract net proceeds from *carrying value*: -net proceeds: Cash received (carrying/book value x percentage NOT going towards holding the receivables/forming account for probable adjustments) + due from factor - recourse liability (obligation) -loss on sale of receivables = carrying value - net proceeds

aging schedule

A schedule (worksheet or spreadsheet) that shows a company's accounts receivable and estimates uncollectible accounts by applying to the various age categories different percentages estimated to be uncollectible based on past experience. An aging schedule also identifies which accounts require special attention by indicating the extent to which certain accounts are past due. -Also, along with estimation, can be used in measuring and accounting for retained, unsold accounts receivable?

bank reconciliation

A schedule explaining any differences between the bank's and the company's records of cash. If some part of the difference arises from items other than transactions not yet recorded by the bank, either the bank or the company must adjust its records.

trade receivables

Accounts receivable and notes receivable that result from sales transactions for a company's goods or services. Trade receivables are usually the most significant type of receivable a company possesses.

receivables turnover ratio

An activity ratio that measures the number of times, on average, a company collects receivables during a period. Computed by dividing net sales by average (net) accounts receivable outstanding during the year. Barring significant seasonal factors, average receivables outstanding can be computed from the beginning and ending balances of net trade receivables.

imputed interest rate (notes receivable)

An approximated interest rate, used when a company cannot determine the interest rate of a note receivable because it has no ready market. To estimate the *present value* of the note, the company approximates an applicable interest rate, which may differ from the stated interest rate.

financial components approach

Approach used for sales of receivables with recourse (legal agreement by which the lender has the rights to pledged collateral in the event that the borrower is unable to satisfy the debt obligation). -In this approach, each party to the sale recognizes only the assets and liabilities that it controls after the sale.

Inventory Turnover (equation)

COGS/Avg Inventory

receivables

Claims held against customers and others for money, goods, or services. Companies classify receivables as either current (short-term, for which collection is expected within a year or the current operating cycle), or noncurrent (long-term). Receivables are further classified in the balance sheet as either trade or nontrade receivables.

entry of sale with recourse

Crest Textiles: Cash $460,000 Due from factor 25,000 Loss on Sale of Receivables 21,000 Accounts (Notes) receivable 500,000 Recourse Liability 6,000 Com Factors: Accounts Receivable $500,000 Due to Customer (Crest) 25,000 Interest Revenue 15,000 Cash 460,000 -if Com Factors collects all receivables, Crest Textiles eliminates recourse liability and increases income -Com Factor's net income is interest revenue of $15,000--it won't have bad debts related to these receivables

recording fair value option

Escobar Company receives note receivable for $620,000--therefore carrying value and fair value of note is $620,000. Escobar elects fair value measurement. Year later : fair value of note has jumped to $810,000, whereas carrying value is still $620,000. Unrealized holding gain = current difference bw fair value and carrying value: ($810,000 - $620,000 = $190,000 or $190k). -journal entry: *Notes Receivable $190k Unrealized Holding Gain or loss--income: $190k* -Escobar adds this holding gain/loss (difference bw fair value and cost of notes receivable) to arrive at fair value reported on balance sheet. -*company reports any change in fair value as unrealized holding gain or loss*. For example: if two years after original receipt of note, the fair value of note receivable is $800,000, Escobar reports *unrealized holding loss* of $10,000 ($810,000 - $800,000) and reduces Notes Receivable Account

Howat Mills & secured borrowing

Howat provides $700,00 of accounts receivable to Citizens Bank as collateral for $500,00 note: -Howat continues to collect accounts receivable; account debtors aren't notified -Citizens Bank assesses finance charge of 1% of accounts receivable and 12 %interest on the note -Howat makes monthly payments to the bank for all cash it collects on the receivables. (check p 348 for detailed accounts)

LCNRV

Lower of Cost or Net Realizable Value

restricted cash

Material amounts of cash set aside for a particular purpose.Companies segregate restricted cash from "regular" cash for reporting purposes, and they classify restricted cash either in the *current assets* or in the *long-term assets* section, depending on the date of availability or disbursement.

compensating balances

Minimum cash balances in checking or savings accounts, required by some banks and other lending institutions in support for existing borrowing arrangements. Companies must disclose in the financial statements the details of deposits held as compensating balances.

bank overdrafts

Occur when a company writes a check for more than the amount in its cash account. -Balance sheet: Companies should report bank overdrafts in the *current liabilities* section, adding them to the amount reported as accounts payable. If material, companies should disclose these items separately.

journal entry for receipt of note, interest issued @ face value

PV of note equals its face value because effective (coupon) rate and stated interest rate are also the same: Notes Receivable 10,000 Cash 10,000 Cash 1,000 Interest Revenue 1,000

securitization

Procedure in the sale (transfer) of receivables that takes a pool of receivables and sells shares in these pools of interest and principal payments, in effect creating securities backed by these pools of assets. Virtually every asset with a payment stream and a long-term payment history is a candidate for securitization.

sales discounts

Reductions from the sales price, offered by sellers to buyers to induce prompt payment. Also called cash discounts. Cash discounts generally read in terms such as 2/10, n/30 (2 percent if paid within 10 days, gross amount due in 30 days). Companies can account for sales discounts using either the gross or the net method; most use the gross method, in which they record sales and related sales discount transactions by entering the receivable and sale at the gross amount and using a Sales Discount account only when they receive payment within the discount period.

cash discounts

Reductions from the sales price, offered by sellers to buyers to induce prompt payment. Also called sales discounts. Cash discounts generally read in terms such as 2/10, n/30 (2 percent if paid within 10 days, gross amount due in 30 days). Companies can account for sales discounts using either the gross or the net method; most use the gross method, in which they record sales and related sales discount transactions by entering the receivable and sale at the gross amount and using a Sales Discount account only when they receive payment within the discount period.

factoring receivables

Sales of receivables to factors, finance companies or banks that buy receivables from businesses for a fee and then collect the remittances directly from the customers. -traditionally associated by factory industries (furniture, fashion) -happens *with recourse* or *without recourse*

cash equivalents

Short-term (less than 3 months), 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. *Generally, only investments with original maturities of three months or less qualify under this definition.* Examples are *Treasury bills, commercial paper, and money market funds* purchased with cash that is in excess of immediate needs. -go under *Cash and Cash Equivalents* section

trade accounts receivable

amounts billed by a business to its customers when it delivers goods or services to them in the ordinary course of business. These billings are typically documented on formal invoices, which are summarized in an accounts receivable aging report.

nontrade accounts receivable

amounts owed to a company by its employees for loans or wage advances, tax refunds owed to it by taxing authorities, or insurance claims owed to it by an insurance company

estimating value of long-term receivables

because historical values become less and less relevant w passage of time, FASB requires companies to disclose not only cost but also *fair value*

calculate: loss due to impairment on loan

carrying amount of investment at time of impairment - PV of resulting maturity value (FV discounted by # of time pds)

effective interest method

chart scheduling note discount amortization (payback): -different columns: date of issue, cash received (annual interest payments), interest revenue (PV of note x interest rate), discount amortized (PV of note - amount of additional revenue that isn't paid back as annual interest), carrying amount of note (present values of notes: 1st carrying value of note should be the note's PV, last one should be its FV)

trade accounts receivable

computations & estimations involved in valuing short-term notes receivable and in recording bad debt expense and related allowance exactly parallel that for ___________

debit

cost of goods sold has a _______ balance

working capital

current assets - current liabilities

change of control

decides when a performance obligation is satisfied an an account receivable recognized: 1. seller obtains right to payment from customer 2. seller passes legal title to the customer 3. seller transfers physical possession of goods 4. seller no longer has significant risks and rewards of ownership of the goods 5. buyer has accepted the asset

recording estimated uncollectibles

imagine manager doesn't think $10,000 of $150,000 sales will be collectible: Bad Debt Expense 10,000 Allowance for Doubtful Accounts 10,000

LCM

lower cost of market where market

fair value

market value of asset or liability

NRV

net realizable value ; estimated sales price - costs to sell

recording receipt of note at discount

notes receivable 10,000 discount on notes receivable 480 cash 9,520

recording write-off of uncollectible account

only done when collection seems impossible: Allowance for Doubtful Accounts 1,000 Accounts Receivable 1,000

historical cost

original cost at the time of a transaction. The term historical cost helps to distinguish an asset's original cost from its replacement cost, current cost, or inflation-adjusted cost.

advance

part of a contractually due sum that is paid or received in advance for goods or services, while the balance included in the invoice will only follow the delivery. It is called a prepaid expense in accrual accounting for the entity issuing the advance.

write-off

reduction of the recognized value of something

historical cost principle

requires that assets be recorded at the cash amount (or its equivalent) at the time that an asset is acquired -For example, if equipment is acquired for the cash amount of $50,000, the equipment will be recorded at $50,000. If the equipment will be useful for 10 years with no salvage value, the straight-line depreciation expense will be $5,000 per year (cost of $50,000 divided by 10 years). The equipment's market value, replacement cost or inflation-adjusted cost will not affect the annual depreciation expense of $5,000. The company's balance sheets will report the equipment's historical cost minus the accumulated depreciation.

FOB shipping point

seller pays for transportation of the goods to the port of shipment, plus loading costs. The buyer pays cost of marine freight transport, insurance, unloading, and transportation from the arrival port to the final destination.

IFRS 9 of IASB

split model -- some financial instruments are recorded at fair value, others (loans, receivables) recorded at amortized cost under certain criteria

note received for property, goods, services

stated interest rate is presumed fair unless: 1. no interest rate stated 2. unreasonable interest rate 3. face amount of note is materially different from current cash sales price for the same or similar items or from current fair value of debt instrument ^if any of these, then company measures present value of note by *fair value* of the good(s) (price that two parties are willing to pay for an asset or liability, preferably in an active market) -journal entry: 5-yr note w/ maturity $35,247, no interest rate, fair value of land $20,000 with original value $14,000: *use fair value as present value*: Notes Receivable (NR) 35,247 Discount on NR(NR-$20,000 fair value): 15,247 Land 14,000 Gain on Disposal of Land (fair value - original value): 6,000 amortize discount to interest revenue over 5 yr life of note using effective-interest method

cash short

sum of receipts and cash in the fund is less than the imprest amount -company debits shortage to Cash Over and Short account

Materiality

this concept allows you to violate another accounting principle if the amount is so small that the reader of the financial statements will not be misled. A classic example is the immediate expensing of a $10 wastebasket that has a useful life of 10 years. The matching principle directs you to record the wastebasket as an asset and then depreciate its cost over its useful life of 10 years. The materiality principle allows you to expense the entire $10 in the year it is acquired instead of recording depreciation expense of $1 per year for 10 years. The reason is that no investor, creditor, or other interested party would be misled by not depreciating the wastebasket over a 10-year period.

present value of interest (amount discounted)

to find this, subtract: face value (FV) of note - present value of the note

remit

transmit or send (money, a check, etc.) in payment

Secured Borrowing

using receivables as collateral in a borrowing transaction. Debtor designate/pledge (custodial) receivables as security for the loan -if the loan isn't paid when due, creditor can convert collateral to cash (collect receivables)

carrying value

value of an asset or liability depending on balance sheet (fair value based on market value of asset)

impairment (receivable)

when a loss event has a negative impact on the future cash flows to be received from the customer