FAR1- Chapter 7-Cash and Receivables

There are two types of selling arrangements for receivables

1) Factorization- a factor is a financial institution that buys receivables for cash, handles the billings and collection of the receivables, and charges a fee for this service. Credit cards are an example.

There are two ways that cash discounts can be recorded

1) Gross Method 2) Net Method

There are two types of borrowing against receivables

1) Secured Borrowing 2) Sales of the receivables

Sales Returns are accounted for similarly to Accounts receivable

All returns in the period of sale are accounted for in a Sales Returns account and those that are estimated to occur are estimated and recorded in the sales returns expense and in a contrarevenue account called allowance for sales returns. This is a revenue contraccount. When returns occur later in the following period, the allowance for sales returns account is credited along with accounts receivable. If the accrual is incorrect, the allowance account for the following period will have either a negative or positive balance.

Transfer of a note to a financial institution is referred to as

Discounting- The financial institution accepts the note and gives the seller cash equal to the maturity value of the note reduced by a discount. The discount is computed by applying a discount rate to the maturity value and represents the financing fee the financial institution charges for the transaction.

Sale without recourse-

If a factoring arrangement is made without recourse, the buyer can't ask the seller for more money if customers don't pay the receivables. The buyer assumes all risk of bad debts.

Notes received solely for cash are always recorded at their cash value

Not the present value, because the cash value is the present value despite what interest may be paid to borrow it.

When an account is deemed uncollectible

The balance is taken out of accounts receivable and allowance for uncollectible accounts(Cr A/R, Dr Allowance) leaving the bad debt expense in the period incurred.

The gross method to account for cash discounts records

The sale at the gross amount first. It views a discount not taken by the customer as part of sales revenue. A contraccount Sales Discounts records the decrease to sales revenue if the discount is taken. The net amount is shown in the income statement. The gross method recognizes discounts not taken as revenue when the sale is made.

To account for a transfer as a sale instead of a secured borrowing, the transferor must surrender all control over the assets trannsferred.

The transferred assets have to be isolated from the transferor beyond reach of creditors Each transferee has the right to pledge or exchange the assets it received. The transferor does not maintain effective control over the transferred assets.

Net realizable value is not affected directly by writing off of old accounts and

The year in which the estimate was made in unaffected by an incorrect estimate. If the priors years estimate was overstated, the bad debt expense in the period following will be lower.

Accounts receivable are also known as

Trade receivables

Uncollectible accounts receivable are recorded as

a debit to bad debt expense and a credit to allowance for uncollectible accounts. (Allowance method)

Trade discounts are

a percentage reduction from the list price. This may be a quantity discount to a large purchaser. The sale is recorded net of the discount price as if the item was valued at the discount price to begin with.

Revenue can only be collected

after the earnings process is virtually complete and collection is reasonably assured

In secured borrowing, the lender typically lends

an amount of money that is less than the amount of the receivables assigned by the borrower. The lendor also usually charges an interest rate on the loan.

Accounts receivable should be recorded

at present day value of future cash receipts using a realistic interest rate. Accounts receivable usually is collected within 30-60 days and so GAAP specifically excludes accounts receivable from the general rule that receivables be recorded at present value. They are valued on the exchange price agreed upon.

Income statement approach to uncollectible accounts receivable that

bad debt is estimated as a percentage of each period's credit sales. It is estimated and put into an allowance account and subtraced from total accounts receivable on the balance sheet.

Accounts receivable aging schedule

classifies the year-end receivable balances according to their length of time outstanding. The longer an account is outstanding, the more likely it is to be uncollectible.

The balance sheet approach to uncollectible accounts receivable

estimates bad debt expense by estimating the net realizable value of accounts receivable to be reported in the balance sheet (using one of the many estimates) and then recording the bad debt expense.The entry to bad debts adjusts the balance in the allowance account to the required ending allowance amount to match the net realizable value of the receivables.

Notes Receivable are

formal credit arrangements between creditor and debtor arising from loans to other entities including affiliated companies and to stockholders and employees, from the extension of the credit period to trade customers, and occasionally from the sale of merchandise, other assets, or services.

Long terms notes also

have an allowance account, but it is more difficult to measure due to the longer duration of the note.

Noninterest bearing notes

have interest that is deducted from the face amount to determine the cash proceeds made available to ht ebuyer at the outset. A discount on note receivable account is used as a contraccount to the receivable. The discount is taken as payment is made as if it were interest revenue. The discount become interest revenue as payment is made.

Sales Returns

is when merchandise is returned for a refund or for credit to be applied to other purchases. This amount must be estimated or else recognizing returns and allowances only as they occur would cause profit to be overstated in one period and understated in the next.

All accounts receivable are recorded in the balance sheet at the

net realizable value (accounts receivable less allowance for uncollectible accounts)

In a secured borrowing, the company

or tranferor simply acs like it borrowed money from the tranferee or lender, with the receivables remaining in the transferor's balance sheet and serving as collateral for the loan. The tranferee recognizes a note receivable.

Cash discounts or "Sales discounts" are

reductions not in the selling price of a good or service but in the amount to be paid by a credit customer if paid within a specified period of time. (2/10, N/30). This is an incentive for quick payment.

Receivables

represent a company's claims to future cash, other assets, or services.

When a company assigns its receivables,

the a certain portion of the receivables must be paid to the lender when collected. This is done by recording a liability for the receivables and whatever finance charge expense relates.

Securitization is when

the company creates a special purpose entity (SPE), usually a trust or subsidiary. The SPE buys a pool of trade receivables, cred card receivables, or loans and then sells related securities, typicalls bonds or commercial paper, that are backed or collateralized by the receivable.

When previously written off accounts are collected,

the entry is reversed and then the collection is recorded as usual. AR Dr, Allowance, Cr, later Cash Dr, A/R Cr.

When a company pledges its receivables,

the receivables are put up as collateral but no specific portion is recorded as liability, only a note payable.

The net method to account for cash discounts records

the sale at the net amount of sale minus all possible discounts. If the discount is not taken, it is recorded as interest revenue. The net method recognized the discount as revenue (interest) after the period has expired.

Accounts receivable are

the sales of goods or services on account

Sale with recourse,

the seller retains all of the risk of bad debts. In effect, the seller guarantees that the buyer will be paid even if some receivables proce to be uncollectible. The only difference in accounting for the sale is a recourse liability.

In a sale of receivables,

the transferor or seller dereconizes or removes the receivable from its balance sheet, acting like it sold them to the transferee or buyer. The transferee recognizes the receivables that it obtained and measures them at their fair value.

Nontrade receivables are

those other than trade receivables and include tax refund claims, interest receivable, and loans by the company to other entities including stocksholders and employees

Direct write off of accounts receivable is used when

uncollectible amounts are not anticipated or are immaterial, or if it's not possible to reliably estrimate uncollectible accounts. Bad debt Dr. A/R Cr

Some companies may employ an income statement approach throughout the year and at year end

use the balance sheet approach