Ch 7: Cash and Receivables

2 percent if paid within 10 days, gross amount due in 30 days

Cash discounts generally read in terms such as 2/10, n/30 meaning...

Because of the peculiar nature of nontrade receivables, companies generally report them as separate items in the balance sheet

How do companies typically report trade receivables?

If unrestricted, report as cash. If restricted, identify and classify as current and noncurrent assets.

How to report cash?

as cash

How to report petty cash and change funds?

their present value (discounted value of cash to be received)

Ideally, a company should measure receivables in terms of...

parenthetically, in the notes

Some companies combine cash with temporary investments on the balance sheet. In these cases, how do they describe the amount of the temporary investments? (2)

trade discounts, cash discounts (sales discounts), sales returns and allowances, time value of money

What are four items that affect the transaction price and thus the accounts receivable balance.

2 percent if paid any time by the tenth day of the following month, with full payment due by the thirtieth of the following month

What does 2/10, E.O.M., net 30, E.O.M mean?

2 percent if paid within 10 days, gross amount due in 30 days

What does 2/10, n/30 mean?

Negotiable instruments such as money orders, certified checks, cashier's checks, personal checks, and bank drafts

What is also considered cash besides coin, currency and funds on deposit at the bank? (5)

attempts to value the receivable at its net realizable value.

What is the net method?

revenue recognition principle indicates that you should recognize revenue when company satisfies its performance obligation

When do you recognize revenue for account receivable?

trade discounts

a way the manufacturers quote prices to wholesalers and retailers. 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.

Yes - Banks do have the legal right to demand notice before withdrawal. But, because banks rarely demand prior notice, savings accounts nevertheless are considered cash.

are savings accounts considered cash?

Investments with maturity of less than 3 months, often combined with cash. Investments with maturity of 3 to 12 months are usually temporary investments.

how to report short term paper

plant expansion, retirement of long-term debt

Cash classified in the long-term section is frequently set aside for _____, or ______

Treasury bills, commercial paper, and money market funds purchased with cash that is in excess of immediate needs

3 examples of cash equivalents

trade receivable

Accounts receivable and notes receivable that result from sales transactions for a company's goods or services.

contra asset

Allowance for Sales Returns and Allowances is a ____ account to Accounts Receivable and offsets accounts receivable on the balance sheet.

balance sheet

Allowance for Sales Returns and Allowances is a contra asset account to Accounts Receivable and offsets accounts receivable on the...

1.Cash equivalents 2.Restricted cash 3.Bank overdrafts

Although the reporting of cash is relatively straightforward, a number of issues merit special attention. These issues relate to the reporting of: (3)

cash

the most liquid asset

cash

the standard medium of exchange and the basis for measuring and accounting for all other items.

receivables

travel advances are classified as...

receivables

travel advances that are assumed to be collected from employees or deducted from their salaries are considered

notes receivable

written promises to pay a certain sum of money on a specified future date. They may arise from sales, financing, or other transactions

receivables

Claims held against customers and others for money, goods, or services.

nontrade receivables

Claims that arise from a variety of nonsales 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.

using the cash for payment of existing or maturing obligations (within a year or the operating cycle, whichever is longer)

Classification of restricted cash in the current section is appropriate if...

the gross or the net method

Companies can account for sales discounts using either of what two methods?

current, noncurrent

Companies classify receivables as either ___ or____

trade, nontrade

Companies classify receivables as either current or noncurrent. Receivables are further classified in the balance sheet as either ___ or ___ receivables.

current assets, long-term assets

Companies classify restricted cash either in the _____ or in the _____ section, depending on the date of availability or disbursement.

a year or during the current operating cycle, whichever is longer.

Companies expect to collect current receivables within....

current

Companies generally classify cash as a ___ asset.

Cash on deposit maintained as compensating balance

Companies should classify separately restricted deposits held as compensating balances against long-term borrowing arrangements as noncurrent assets in either the investments or other assets sections, using a caption such as "______"

the amount of consideration expected to be received from a customer

Companies should record accounts receivable and related revenue at...

current liabilities, accounts payable

Companies should report bank overdrafts in the _____ section, adding them to the amount reported as ____. If material, companies should disclose these items separately.

receivables

Companies treat postdated checks and I.O.U.s as...

receivables, prepaid expense

Companies treat travel advances as ____ if collected from employees or deducted from their salaries. Otherwise, companies classify the travel advance as a ______.

Classify as current or noncurrent in the balance sheet. Disclose separately in notes details of the arrangement.

Describe how to classify compensating balances on the balance sheet...

debit cash 6000 credit accounts receviable 6000

Describe the debit/credit transaction under the gross method: (Sales of $10,000, terms 2/10, n/30) Payment on $6,000 of sales received after discount period

debit cash 3920, debit sales discounts 80 credit accounts receivable 4000

Describe the debit/credit transaction under the gross method: (Sales of 10k, terms 2/10, n/30) Payment on $4,000 of sales received within discount period

debit accounts receivable 10k, credit sales revenue 10k

Describe the debit/credit transaction under the gross method: Sales of 10k, terms 2/10, n/30

debit cash 6000 credit cash accounts receivable 5880 credit sales discounts forfeited 120

Describe the debit/credit transaction under the net method: (Sales of $10,000, terms 2/10, n/30) Payment on $6,000 of sales received after discount period

Debit cash 3920 credit accounts receivable 3920

Describe the debit/credit transaction under the net method: (Sales of 10k, terms 2/10, n/30) Payment on $4,000 of sales received within discount period

Debit accounts receivable 9800, credit accounts receivable 9800

Describe the debit/credit transaction under the net method: Sales of 10k, terms 2/10, n/30

three months

Generally, only investments with original maturities of _____ or less qualify as cash equivalents

the net method

Hanley Company sells goods for $10,000 to Murdoch Inc. with terms 2/10, net 30, and Hanley expects that the discount will be taken. As a result, Hanley records the accounts receivable and related sales revenue at its net price of $9,800. This approach is often referred to as....

short-term receivables

In terms of the PV of receivables, materiality means it must make a difference to a decision-maker. The FASB believes that present value concepts can be ignored for...

gross

In the ____ method, the company recognizes sales discounts when it receives payment within the discount period. The company's income statement then shows sales discounts as a deduction from sales to arrive at net sales.

variable consideration

In the measurement of transaction, companies must consider items such as ____ which may affect the accounts receivable balance

accounts receivable, Sales Discounted Forfeited

In the net method, if purchaser fails to take the discount, the company debits the discount not taken to ____ and credits ____

debits the discount not taken to accounts receivable and credits Sales Discounted Forfeited.

In the net method, what happens if the purchaser fails to take the discount?

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 this

bank overdrafts

Occur when a company writes a check for more than the amount in its cash account.

accounts receivable

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.

restricted cash

Petty cash, payroll, and dividend funds are examples of cash set aside for a particular purpose. When material in amount, companies segregate _____ from "regular" cash for reporting purposes.

office supplies inventory, prepaid expense

Postage stamps on hand are classified as part of ____ or as a ____

Cash discounts (sales discounts)

Reductions from the sales price, offered by sellers to buyers to induce prompt payment.

contra revenue

Sales Returns and Allowances is a ____ account to Sales Revenue and offsets sales revenue on the income statement.

income statement.

Sales Returns and Allowances is a contra revenue account to Sales Revenue and offsets sales revenue on the...

cash equivalents

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 value due to changes in interest rates

1.Advances to officers and employees. 2.Advances to subsidiaries. 3.Deposits paid to cover potential damages or losses. 4.Deposits paid as a guarantee of performance or payment. 5.Dividends and interest receivable. 6.Claims against: (a)Insurance companies for casualties sustained. (b)Defendants under suit. (c)Governmental bodies for tax refunds. (d)Common carriers for damaged or lost goods. (e)Creditors for returned, damaged, or lost goods. (f)Customers for returnable items (crates, containers, etc.).

Some examples of nontrade receivables are (6)

temporary investments

Some negotiable instruments provide small investors with an opportunity to earn interest. These items, more appropriately classified as...

One idea would have companies report only cash. If an asset is not cash and is short-term in nature, it should be reported as a temporary investment. An interesting moral to this story is that when times are good, some careless accounting may work. But in bad times, it quickly becomes apparent that sloppy accounting can lead to misleading and harmful effects for users of the financial statements.

The FASB has studied whether to eliminate the cash-equivalent classification from financial statement presentations altogether due to issues with misleading cash equivalent definition. What is one idea that the FASB has come up with to mitigate risks...

transaction price

The amount of consideration that a company expects to receive from a customer in exchange for transferring goods or services.

recognition, valuation, and disposition

The basic issues in accounting for accounts and notes receivable are (3)

change of control

The concept of ____ is the deciding factor in determining when a performance obligation is satisfied and an account receivable recognized.

legally restricted deposits held as compensating balances against short-term borrowing arrangements among the "Cash and cash equivalent items" in current assets

To avoid misleading investors about the amount of cash available to meet recurring obligations, the SEC recommends that companies state separately....

percentages

Trade discounts are commonly quoted in...

trade receivable

Usually the most significant type of receivable a company possesses.

current liability

bank overdrafts are classified as...

cash

cash is classified as...

cash separately classified as a deposit maintained as compensating balance

compensating balances are classified as...

gross

most companies use the ___ method to account for sales discounts

short term, long term

notes receivable may be ____ or ___

cash

petty cash and change fund are classified as...

prepaid expenses

postage on hand (as stamps or in postage meters) is classified as...

receivables

postdated checks and IOUs are classified as...

collectible

postdated checks and IOUs are considered receivables when assumed to be...

contra revenue, credit

sales discounts are what type of account? what is their normal balance?

cash equivalents, temporary investments

short-term paper is classified as either... (2)