Exam 3 Review - ACCT 3304

Assets

Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events Consists of: - CA - Noncurrent Assets

Disclosures About Receivables on a Disaggregated Basis

1. A roll-forward schedule of AUA from the beginning of the reporting period to the end of the reporting period 2. The nonaccrual status of receivables by class of receivables - Lenders classify loans as nonaccrual loans when payment is 90 days or more overdue - Because of the overdue status of the receivable, interest is no longer accruing on the outstanding balance 3. Impaired receivables by type of receivable

Long-Term Investments

1. Investments in debt and equity securities - Bonds - CS - LT Notes - Listed below Total CA in "Investments" - At most, includes AFS securities and HTM securities, depending on the maturity dates and management intent - Do NOT include trading securities 2. Investments in tangible fixed assets not currently used in operations - Land held for speculation 3. Investments set aside in special funds - Sinking fund - Pension fund - Plant expansion fund - Cash surrender value of life insurance 4. Investments in nonconsolidated subsidiaries or affiliated companies

Limitations of the Balance Sheet

1. Most assets and liabilities are reported at HC - Information provided in the BS is often criticized for not reporting a more relevant Fair Value 2. Companies use judgments and estimates to determine many of the items reported 3. Many items of financial value are omitted if they cannot be recorded objectively

Statement of Cash Flows

A FS that provides relevant information about the cash receipts and cash payments of an enterprise during a period - The financial statement which summarizes the operating, investing, and financing activities of an entity for a period of time - The first step in preparing is to determine the cash provided by or used in operating activities - Helps users evaluate liquidity, solvency, and financial flexibility Answers: - Where did the cash come from? - What was the cash used for? - What was the change in the cash balance? Contents: - Operating Activities - Investing Activities - Financing Activities Reports: 1. Cash effects of operations during a period 2. Investing transactions 3. Financing transactions 4. Net increase or decrease in cash during the period

Allowance Method

A method of accounting for bad debts that involves estimating uncollectible accounts at the end of each period - Records estimated BDE now - Adheres to GAAP - Companies report on the BS as NRV - Companies estimate uncollectible accounts at the end of each period using information about past and current events as well as forecasts of future collectability NRV = AR - AUA AJE for estimate of uncollectible accounts: BDE is debited AUA is credited JE for WO: AUA is debited AR is credited

Trade Discounts

A reduction in the listed price of a product or service - Company directly reduced the gross amount of sales revenue recorded - No contra-revenue account used - Do not appear in the company's accounting records - Customers are billed an amount that is less than list price Example: Ryobi sells a cordless drill with a suggested retail price of $99 to Home Depot for $70, a trade discount of approximately 30%. Home Depot, in turn, sells the drill for $99. What amount should Ryobi and Home Deport record as revenue for this transaction? - Ryobi should report the net price of $70 as revenue - Home Depot should record the retail price of $99.99 as revenue

Notes Receivable

A written promise to pay a certain sum of money at a specific future date - Is supported by a formal promissory note - Is a negotiable instrument - Always contains an interest element - May be short-term or long-term and generally include an interest component - Can be classified as current, trade, and nontrade Types: - Interest-Bearing - Zero-Interest-Bearing Originate from: - Lending transactions [majority of notes] issued by banks - Loans to employees and subsidiaries - Existing customers who need to extend payment period of an outstanding receivable - Sales to new customers or high-risk customers - Sales of PP&E JE: NR is debited Cash is credited Interest JE: Cash is debited Interest Revenue is credited

Trade Receivables

AR and NR that result from sales transactions

Sales Discounts Forfeited

Account used when sales discount is lost - An item of "other revenues and gains" in the income statement - Used with the net method of recording AR from customers

Refund Liability

Amount the seller estimates will be refunded to customers who make returns - Reduced by actual returns

Average Days to Collect Receivables (ADCR)

An average collection period - Used to assess the effectiveness of a company's credit and collection policies - Number of days it takes company to collect its AR The general rule is that the average collection period should not exceed the credit term period - For example, if customers are given a 60-day period for payment, then the average collection period should not be too much in excess of 60 days = 365 / Accounts Receivable Turnover

Aging Schedule

Applies a different percentage based on past experience to the various age categories - Serves as a control device by identifying which accounts require special attention based on how long they have been past due - The older an AR, the less likely a company will collect from a customer, so the estimated percent of uncollectible increases with age of AR - Often called an "AR detail" 1. Calculate Ending AUA using aging schedule for AR 2. Determine and provide AJE for BDE - Unadjusted AUA - Ending AUA = BDE 3. Determine NRV reported on BS - AR - Ending AUA = NRV Mostly used to fine-tune allowances for uncollectibles and to ensure AR are reported at NRV on the BS

Other Assets

Assets that do not fit well into one of the other asset classifications - Should limit this section to include only unusual items sufficiently different from assets included in specific categories Examples: - Special Funds - Deferred Income Taxes - Property held for sale - Restricted cash or securities

Intangible Assets

Assets that lack physical substance and are not financial instruments - Limited-life intangible assets are amortized, excludes assets such as Goodwill - Assets such as Goodwill are periodically assessed for impairment—loss of value Examples: - Patents - Copyrights - Franchises - Goodwill—purchase/acquisition of other companies - Trademarks - Trade Names - Customer Lists

Noncurrent Assets

Assets that will be used or turned into cash beyond one year AKA LTA Consists of: - LT Investments - PP&E - Intangible Assets

Current Assets

Cash and other assets a company expects to convert into cash, sell, or consume either in one year or in the operating cycle, whichever is longer - The operating cycle is the average time between when a company acquires materials and supplies and when it receives cash for sales of the product - Presented in the BS in order of liquidity - Restricted funds are excluded from CA Consists of: - Cash and cash equivalents - Short-term investments - Receivables - Inventories - Prepaid expenses

Receivables

Claims held against customers and others for money, goods, or services - Is valued as a estimated amount collectible - Classified in the BS as either trade or nontrade receivables - May be a CA or a non-current asset - Often referred to as loans and receivables A company should clearly identify - Anticipated loss due to uncollectibles (AUA) - Amount and nature of any nontrade receivables - Receivables used as collateral Examples: - AR - NR - Current portion of LTNR (collectible within next 12 months)

Disposition of Receivables

Companies may transfer receivables to other companies in order to get cash now - Sales financing for customers or because money is tight and access to normal credit is unavailable Reasons: - Competition [e.g. improved financial flexibility] - Immediate need of cash - Billing and collection are time-consuming and costly Two ways to transfer receivables - Sale of receivables (Factoring) - Secured borrowing (Receivables as collateral for loan)

Estimating Allowance for Doubtful Accounts

Companies must estimate the amount when they use the allowance method - Percentage-of-Receivables Approach - Aging Schedule

Valuation of Notes Receivable

Companies record and report STNR at the net amount expected to be collected - The primary NR allowance account is Allowance for Doubtful Accounts - The estimations involved in valuing STNR and in recording BDE and the related allowance exactly parallel that for trade AR - Companies estimate the amount of uncollectibles by an analysis of the receivables Long-term NR involve additional estimation problems

Available-For-Sale Securities

Debt securities not classified as HTM or trading securities - Reported at Fair Value

Cash and Cash Equivalents

Currency and demand deposits at a financial institution - Cash - Petty Cash Funds - Cash on Deposit (checking and savings accounts) - Undeposited checks Short-term, highly liquid investments that will mature within three months or less - Time deposits - Commercial paper (short-term investments) - US or foreign securities (Treasury bills) - CDs - Money market funds Reported at approximate Fair Value on BS - Considered a CA

Held-To-Maturity Securities

Debt securities a company has positive intent and ability to hold to maturity - Reported at amortized cost

Trading Securities

Debt securities bought and held primarily for sale in the near term to generate income on short-term price differences - Should always be reported as CA

Gross Method

Does NOT assume that the customer will take advantage of the discount Example: Hanley Company has the following transactions with Murdoch - On March 1, Hanley Company sells goods for $10,000 to Murdoch on March 1 with terms 2/10, net 30 - On March 8, Hanley receives a payment of $3,920 from Murdoch related to the sale on March 1 - On March 26, Hanley receives $6,000 related to the sale on March 1 March 1 JE: AR is debited (10,000) Sales Revenue is credited (10,000) March 8 JE: Cash is debited (3,920 = 4,000 * 98%) Sales Discount debited (80 = 4,000 * 2%) AR is credited (4,000) March 26 JE: Cash is debited (6,000) AR is credited (6,000)

Net Method

Does assume that the customer will take advantage of the discount Example: Hanley Company has the following transactions with Murdoch - On March 1, Hanley Company sells goods for $10,000 to Murdoch on March 1 with terms 2/10, net 30 - On March 8, Hanley receives a payment of $3,920 from Murdoch related to the sale on March 1 - On March 26, Hanley receives $6,000 related to the sale on March 1 March 1 JE: AR is debited (9,800 = 10,000 * 98%) Sales Revenue is credited (9,800 = 10,000 * 98%) March 8 JE: Cash is debited (3,920 = 4,000 * 98%) AR is credited (3,920 = 4,000 * 98%) March 26 JE: Cash is debited (6,000) AR is credited (5,880 = 6,000 - 120) Sales Discount Forfeited is credited (120 = 6,000 * 2%)

Short-Term Investments

Equity securities are investments in PS and CS of other companies - Generally reported at fair value - Considered a CA Changes are reported in NI unless - Securities are accounted for under equity method - Fair Value of securities is impractical to determine Debt securities are investments in bonds or notes of other companies or governmental entities - HTM - Trading - AFS

Prepaid Expenses

Expenses paid in cash before they are used or consumed - Reported at the amount of the unexpired or unconsumed cost - Considered a CA - Cash payment occurs before the expense is recorded - If amounts are material, companies may have a note disclosure detailing the composition of the balances Examples: - Supplies - Insurance - Advertising - Rent - Taxes

Sale of Receivables

Factors are companies that buy receivables for a fee and then collect the payments directly from customers AKA Factoring Can be arranged via: - Sale Without Recourse - Sale With Recourse

Choice of Interest Rate

If a company cannot determine that fair value and if the note has no ready market, determining the PV of the note is more difficult To estimate the PV of a note, the company must: - Approximate an applicable interest rate that may differ from the stated interest rate—process called imputation which results in an imputed interest rate - Determine the imputed interest rate when it receives the note

Investing Activities

Includes making and collecting loans and acquiring and disposing of investments (both debt and equity) and property, plant, and equipment Affects LTA ⸰ Long-Term Investments ⸰ PP&E ⸰ Less AD ⸰ Patents + Proceeds from Sale of PP&E + Proceeds from Sale of Investments + Proceeds from Collection of NR - Purchase of PP&E using CASH - Purchase of Debt/Equity Securities of Other Entities - NR (principle only) = Net cash provided by IA CFIA Inflow - Sale of PP&E - Sale of debt or equity securities of other entities - Collection of loans to other entities CFIA Outflow - Purchase of PP&E - Purchase of debt and equity securities of other entities - Loans to other entities

Statement of Cash Flows Format

Indirect Method:

Financing Activities

Involves liability and stockholders' equity items They include - Obtaining resources from owners and providing them with a return on their investment - Borrowing money from creditors and repaying the amounts borrowed Affects LT Liabilities and Stockholders' Equity ⸰ Dividends Payable ⸰ NP (STNP and Long-Term NP) ⸰ BP ⸰ CS ⸰ RE ⸰ TS + Proceeds from issuing BP/NP + Proceeds from issuing Stock - Payment of Cash Dividends - Payment of LT Debt (principle only) - Repurchase of TS = Net cash provided by FA CFFA Inflow - Issuance of capital stock - Issuance of debt (bonds and notes) CFFA Outflow - Payment of cash dividends - Redemption of debt - Reacquisition of capital stock

Operating Activities

Involves the cash effects of transactions that enter into the determination of NI - Reflects the core business activities of the organization - Does NOT include dividends or NP - Can be calculated by adding to or deducting from net income those items in the income statement that do not affect cash Affects CA, CL, and items from the IS - DE is added - NI is added CA: ⸰ AR ⸰ Inventory ⸰ Supplies ⸰ Prepaid Expenses CL: ⸰ AP ⸰ Wages Payable ⸰ Unearned Revenue + NI (starting point) + DE + Decreases in CA + Increases in CL + Receipt of Interest from a NR - Increases in CA - Decreases in CL = Net cash provided by OA CFOA Inflow - When cash receipts (revenues) exceed cash expenditures (expenses) CFOA Outflow - When cash expenditures (expenses) exceed cash receipts (revenues)

Is It a Sale or a Borrowing?

Is a sale if three conditions are met: 1. Transferred assets are isolated from transferor 2. Transferee has right to pledge or sell assets 3. Transferor does not maintain control through repurchase agreement

Format of the Balance Sheet

Most common form is the Report Form which lists liabilities and stockholders' equity directly below assets, on the same page Uncommon formats: - Deduct current liabilities from current assets to arrive at working capital - Deduct all liabilities from all assets

Interest-Bearing Note Receivable

Notes that have a stated rate of interest - Is generally issued at face value, stated = market rate NR with a discount: PMT = FV * Stated Rate PV = PV of principal + PV of interest - PV of principal = FV * PV Factor - PV of interest = PMT * PVOA Factor FV = Full face value Discount on NR = FV - PV - Discount on NR is a contra asset account to NR JE for Lender: NR is debited (FV) Discount on NR is credited (FV- PV) Cash is credited (PV) AJE for Interest Revenue for Lender: Cash is debited (PMT) Discount on NR is debited Interest Revenue is credited (CV * Market Rate * Time) JE for Collection by Lender: Cash is debited (full amount) NR is credited (full amount)

Zero-Interest-Bearing Note Receivable

Notes that have interest included in face amount - Often called "deep-discount" NR - There are no regular, cash interest payments made on the note - The cash received by the borrower when the note is first executed is less than face value, but the borrower must pay back the full face value on the maturity date of the note PV = cash given to borrower FV = Full face value Discount on NR is the difference - Discount on NR is contra asset account to NR To determine the amount that should be recorded, the following must be known - Face Amount - Term of NR - Effective Interest Rate JE for Lender: NR is debited (FV) Discount on NR is credited (FV - PV) Cash is credited (PV) AJE for Interest Revenue for Lender: Discount on NR is debited (CV * Market Rate * Time) Interest Revenue is credited (CV * Market Rate * Time) JE for Collection by Lender: Cash is debited (full amount) NR is credited (full amount)

Current Liabilities

Obligations that a company reasonably expects to liquidate either through the use of CA or the creation of other CL - Most commonly lists NP, AP, or ST debt as the first items - Income taxes payable, current maturities of LT debt, or other CL are commonly listed last Consists of: - Payables - STNP - NP - Current - BP - Current - Collections received (e.g., Unearned Revenue) - Other Accrued Liabilities

Noncurrent Liabilities

Obligations that a company reasonably expects to settle beyond a normal operating cycle (or greater than one year) - Are reclassified as current if they will mature within the next 12 months AKA LTL Consists of: - Obligations arising from specific financing situations (e.g., bonds, LT leases, and LTNP) - Obligations arising from the ordinary operations of the company (e.g., pension obligations and deferred income tax) - Obligations that depend on the occurrence or nonoccurrence of one or more future events (e.g., service/product warranties and contingencies) Do NOT include accrued interest on BP Examples: - BP - NP - Other LT Debt - Deferred Income Tax Liabilities - Lease obligations - Pension obligations

Recovery of an Uncollectible Account

Occasionally, a company collects from a customer after it has written off the account as uncollectible - Affects only BS accounts—AR and AUA NOT BDE JE to Reverse WO: AR is debited AUA is credited JE for Collection: Cash is debited AR is credited

Sales Discounts (Cash Discounts)

Offered to induce prompt payment - Presented as 2/10, n/30 (2% discount if paid within 10 days or the full amount due in 30 days) or 2/10, E.O.M., net 30, E.O.M. - A contra-revenue account Recorded via - Gross Method - Net Method

Accounts Receivables

Oral promises of the purchaser to pay for goods and services sold - "Open accounts" resulting from short-term extensions of credit - Arise as part of a revenue arrangement - Recognize revenue when a PO is satisfied (transfer of control) - Sell on account to customers with whom we have done business with for a long time - Arrange / establish "credit terms" with them based on their credit history JE: AR is debited Sales Revenue is credited COGS is debited Inventory is credited

Liabilities

Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events Consists of: - CL - Noncurrent Liabilities

Nontrade Receivables

Receivables that originate from transactions outside the normal course of business Does NOT include oral promises of the purchaser to pay for goods and services sold Examples: - Advances to officers, employees, and subsidiaries - Deposits paid to cover potential damages or losses, or as a guarantee of performance or payment - Dividends and interest receivable - Claims against insurance companies for casualties sustained, for tax refunds, or for damaged or lost goods - Claims against defendants under suit

Recognition of Notes Receivable

Recorded at the PV of cash expected to be collected - When stated rate = effective rate, the NR sells at face value - When rates are not equal, the note will have a discount or premium which will be amortized over the life of the NR Two rates: - Stated (nominal/face) interest rate - Effective-interest (market/effective yield) rate

Solvency

Refers to the ability of a company to pay its debts as they mature - Companies with more debt are more risky

Percentage-of-Receivables Approach

Reports estimate of receivables at NRV - Companies may apply this method using one composite rate 1. Calculate Ending AUA - Ending AUA = AR * x% 2. Determine and provide AJE for BDE - Unadjusted AUA - Ending AUA = BDE 3. Determine NRV reported on BS - AR - Ending AUA = NRV

Balance Sheet

Reports the assets, liabilities, and stockholders' equity of a business enterprise at a specific date Provides information about: - Resources - Obligations to creditors - Equity in net resources = net assets = equity Helps in predicting the amounts, timing, and uncertainty of future cash flows AKA Statement of financial position Similar items (elements) are grouped together to determine significant totals and subtotals: 1. Assets 2. Liabilities 3. Equity

Working Capital

Represents the net amount of a company's relatively liquid resources = Total Current Assets - Total Current Liabilities

Equity

Residual interest in the assets of an entity that remains after deducting its liabilities. In a business enterprise, the equity is the ownership interest - CS + APIC = total amount raided from the company's IPO AKA Owners' Equity or Stockholders' Equity Five Sections 1. Capital stock 2. APIC 3. RE 4. AOCI 5. TS

Allowance for Doubtful Accounts

Shows the estimated amount of AR that the company does not expect to collect in the future - A permanent contra asset account - A credit balance will absorb the specific customer WOs when they occur in the future AKA Allowance for Uncollectible Accounts AJE for estimate of uncollectible accounts: BDE is debited AUA is credited

Inventories

Stocks of goods held to satisfy future sales - Considered a CA Basis of valuation: - Lower-of-cost-or-net realizable value - Lower-of-cost-or-market Companies must disclose its cost flow assumption used (e.g., FIFO or LIFO)

Property, Plant, and Equipment

Tangible long-lived assets used in the regular operations of the business - Either depreciates or depletes - Land does not depreciate AKA PP&E Examples: - Land - Buildings - Machinery - Furniture - Tools - Right-of-Use Assets (Leased) - Wasting Resources (Timberland and Minerals)

Present Value of an Annuity Due

The PV of a series of equal PMTs, to be withdrawn at equal intervals at the beginning of the period - There is always one discount period less - The PV of the cash flows from the annuity due is exactly "i" higher than the PV of an ordinary annuity (1 + i) PV = PMT * [ PVOA Factor * (1 + i) ] OR PV = PMT * PVAD Factor PMT = PV / [ PVOA Factor * (1 + i) ] OR PMT = PV / PVAD Factor PVAD Factor ≈ PVOA Factor * (1 + i) PVOA Factor is determined via calculation or via the Present Value of an Ordinary Annuity of 1 PVAD Factor is determined via calculation or via the Present Value of an Annuity Due of 1 table - Can also be determined if PVOA is known and is multiplied by 1 + "i"

Present Value of an Ordinary Annuity

The PV of a series of equal PMTs, to be withdrawn at equal intervals at the end of the period PV = PMT * PVOA Factor PMT = PV / PVOA Factor PVOA Factor is determined via calculation or via the Present Value of an Ordinary Annuity of 1

Financial Flexibility

The ability of an enterprise to take effective actions to alter the amounts and timing of cash flows so it can respond to unexpected needs and opportunities The higher a company's flexibility, the better they are able to - Survive bad times - Recover from unexpected setbacks - Take advantage of profitable and unexpected investment opportunities

Accumulated Other Comprehensive Income

The aggregate amount of the other CI items, such as unrealized gains and losses on certain investments

Net Realizable Value

The amount of accounts receivable a business expects to collect = AR - Ending AUA = NRV

Transaction Price

The amount of consideration that a company expects to receive from a customer in exchange for transferring goods or services - An amount specified and determined in the contract - Easily determined because it is a fixed amount Variable Consideration - The price of a good or service is dependent on future events - Often include discounts, returns and allowances, rebates, and performance bonuses Affected by: 1. Trade Discounts 2. Cash/Sales Discounts 3. SR&A 4. TVM

Liquidity

The amount of time that is expected to elapse until an asset is realized or otherwise converted into cash - The greater __________________ is, the lower the risk of failure is - Can be assessed by calculating Working Capital How quickly will my assets convert to cash?

Retained Earnings

The corporation's accumulated, undistributed earnings Can be - Unappropriated: amount usually available for dividend distribution - Restricted: amount restricted by bond indentures or other loan agreements

Treasury Stock

The cost of shares repurchased by the company - Reduction of equity (i.e., contra equity account)

Transfer of Control

The deciding factor in determining when a PO is satisfied and an AR recognized Indicators: - Seller has the right to payment from the customer - Seller has passed legal title to the customer - Seller has transferred physical possession of the goods - Seller no longer has significant risks and rewards of ownership of the goods - Customer has accepted the asset The period in which an asset can be returned has expired is NOT an indication

Additional Paid in Capital

The excess of amounts paid in over the par or stated value

Sale Without Recourse

The factor assumes the credit-risk of some customers not paying their accounts receivable balance - Factor charges more they take on more risk by being responsible for any bad debts - Is an outright sale both in form and substance - Seller records loss on sale Seller: - Debits Cash for the proceeds and credits Accounts Receivable for the face value of the receivables - Recognizes the difference, reduced by any provision for probable adjustments (discounts, returns, allowances, etc.), as Loss on Sale of Receivables - Uses a Receivable from Factor account (reported as a receivable) to account for the proceeds retained by the factor to cover probable sales discounts, sales returns, and sales allowances JE for Seller: Cash is debited Receivable from Factor is debited (Amount Sold * Retained %) Loss on Sale of Receivables is debited (Amount Sold * Finance Charge) AR is credited (Amount Sold) JE for Buyer: AR is debited (Amount Bought) Due to Customer is credited (Amount Bought * Retained %) Interest Revenue is credited (Amount Bought * Finance Charge) Cash is credited

Present Value of a Single Sum

The value now of a given amount to be paid or received in the future, assuming compound interest To solve: - Discount all cash flows from the future to the present - In this case, discounting reduces the amounts or values, so that the present value is less than the future amount = FV * PV Factor PV Factor is determined via calculation or via the Present Value of 1 (Present Value of a Single Sum) table - If compounded semi-annually, divide "i" by 2 and multiply "n" by 2 - If compounded quarterly, divide "i" by 4 and multiply "n" by 4

Presentation of Receivables

The general rules in classifying receivables are as follows: 1. Segregate different types of receivables if material 2. Offset the valuation accounts against the proper receivable accounts 3. Determine that receivables classified in the CA section will be converted into cash within the year or the operating cycle, whichever is longer 4. Disclose any loss contingencies that exist on the receivables 5. Disclose any receivables designated or pledged as collateral 6. Disclose the nature of credit risk inherent in the receivables

Effective-Interest Rate

The interest rate used in the market to determine the value of the note, also referred to as the discount rate used to determine PV - Represented by i AKA Market Rate or Effective Yield

Stated Interest Rate

The interest rate written into a NR contract - Represents the cash rate of interest paid by the borrower - Used to determine PMT amount

Sale With Recourse

The seller guarantees payment to the purchaser in the event the debtor fails to pay - The seller must recognize a liability related to possible losses on uncollectible accounts + Cash received + Receivable from Factor - Recourse Liability = Net Proceeds + Carrying (Book) Value - Net Proceeds = Loss on Sale of Receivables JE for Seller: Cash is debited Receivable from Factor is debited (Amount Sold * Retained %) Loss on Sale of Receivables is debited (Finance Charge + Recourse Liability) AR is credited (Amount Sold) Recourse Liability is credited JE for Buyer: AR is debited (Amount Bought) Due to Customer is credited (Amount Bought * Retained %) Interest Revenue is credited Cash is credited

Capital Stock

The total par or stated value of the shares issued - Includes CS and PS - Companies must disclose the par value per share and the authorized, issued, and outstanding share amounts for CS and PS

Direct Write-Off Method

Theoretically deficient - Wait, then records BDE - BDE is only recognized when an account is written off - Violates expense recognition principle: no matching of BDE with related revenue - Receivable not stated at realizable value - Violates GAAP when BDE amount is material

Time Value of Money

Theoretically, cash received on account after the period of sale contains some interest revenue - Companies ignore interest revenue related to AR because any amount usually is not material in relation to NI for the period - Affects certain NR transactions

Loan (Borrower)

To borrow money from a financial institution like a bank - Requires the company [i.e. borrower] to pledge receivables as collateral for the loan - The receivable remain under control of the borrower - If the loan is not paid when due, the lender can convert the collateral to cash - Disclosure on the FS is needed to indicate that AR are pledged or assigned as collateral on the borrowing - If the fair value of the pledged assets falls below the amount borrowed, the borrower will be required to make up the difference or face foreclosure JE for Borrower: Cash is debited Interest Expense is debited (Pledged AR * Finance Charge) NP is credited (Full Amount) JE to Reduce AR: Cash is debited (Collected - Sales Discounts) Sales Discounts is debited SR&A is debited AR is credited JE to Remit Collections + Accrued Interest Interest Expense is debited (Full Amount * Rate * Time) NP is debited Cash is credited (NP + Interest Expense) JE to Record Collection of AR less WO: Cash is debited AUA is debited AR is credited (Pledged AR - WO)

Loan (Lender)

To borrow money from a financial institution like a bank - Requires the company [i.e. borrower] to pledge receivables as collateral for the loan - The receivable remain under control of the borrower - If the loan is not paid when due, the lender can convert the collateral to cash - Disclosure on the FS is needed to indicate that AR are pledged or assigned as collateral on the borrowing - If the fair value of the pledged assets falls below the amount borrowed, the borrower will be required to make up the difference or face foreclosure JE for Issuance of NR: NR is debited (Full Amount) Interest Revenue is debited (Pledged AR * Finance Charge) Cash is credited JE to Record Interest Cash is debited Interest Revenue is credited (Full Amount * Rate * Time) NR is credited

Sales Returns and Allowances (Estimated)

Transactions in which the seller either accepts returns or grants a reduction in the purchase price (an allowance) so that the buyer will keep the goods - A contra-revenue account Identifies: - Potential problems with inferior merchandise - Inefficiencies in filling orders - Delivery or shipment mistakes JE for Estimated Returns: SR&A is debited Refund Liability is credited Estimated Inventory Returns is debited COGS is credited The Estimated Inventory Returns account balance is included with the Inventory account balance on the BS

Sales Returns and Allowances (Actual)

Transactions in which the seller either accepts returns or grants a reduction in the purchase price (an allowance) so that the buyer will keep the goods - A contra-revenue account Identifies: - Potential problems with inferior merchandise - Inefficiencies in filling orders - Delivery or shipment mistakes JE for Sale: AR is debited Sales Revenue is credited COGS is debited Inventory is credited JE for Actual Returns: SR&A is debited AR is credited Returned Inventory is debited COGS is credited The Returned Inventory account balance is included with the Inventory account balance on the BS

Usefulness of the Balance Sheet

Used to - Compute rates of return - Evaluate capital structure - Assess risk and future cash flows - Analyze a company's liquidity, solvency, and financial flexibility

Accounts Receivable Turnover (ARTO)

Used to assess the liquidity of the receivables - Measures the number of times the average balance of accounts receivable is collected during the period - The numerator should include only net credit sales - Shows how successful a company is in collecting its outstanding receivables = Net Sales / Average Net AR

Valuation of Accounts Receivable

When a company sells goods and services on credit to customers, it does not know in advance which customers may not be able to pay - Reward: increased sales - Risk: might not receive payment later—cost of risk is BDE Two methods are used in accounting for uncollectible accounts - Direct WO Method - Allowance Method

Securitization of Receivables

When a lender with a pool of assets, such as mortgage loans, sells shares in these pools of interest and principle payments - Is a popular form of sale (transfer) of receivables - Requires the company [i.e. borrower] to pledge receivables as collateral for the loan - The receivables remain under control of borrower - If borrower does not repay loan, lender can force conversion of receivables to cash - Cash used to repay lender - Can be done with virtually every asset with a payment stream and a long-term payment history Unlike factoring - Many investors are involved - Margins are tight - Receivables are of generally higher quality - The seller usually continues to service the receivables

Notes Received for Property, Goods, or Services

When a note is received in exchange for property, goods, or services in a bargained transaction entered into at arm's length, the stated interest rate is presumed to be fair unless: - No interest rate is stated - The stated interest rate is unreasonable - The face amount of the note is materially different from the current cash sales price for the same or similar items or from the current fair value of the debt instrument JE: NR is debited (FV) Discount on NR is credited (FV - Fair Value) Asset is credited (HC) Gain is credited (Fair Value - HC)

Recording A Write-Off

When companies have exhausted all means of collecting a past-due account and collection appears impossible, the company should write off the account - Affects only BS accounts—AR and AUA NOT BDE JE for WO: AUA is debited AR is credited