Financial Accounting Chapter 5

Direct Write-Off Method

A method of accounting for bad debts in which the company waits until a customer's account receivable proves uncollectible and then debits Uncollectible-Account Expense and credits the customer's Account Receivable.

Allowance Method

A method of recording collection losses based on estimates of how much money the business will not collect from its customers.

Aging-of-Receivables

A way to estimate bad debts by analyzing individual accounts receivable according to the length of time they have been receivable from the customer.

FOB

Acronym for "free on board"; used in quoting shipping terms,

Other Comprehensive Income

Certain types of revenue, expenses, gains, and losses that are allowed to bypass the income statement. The items are reported either in a separate statement or in a combined statement of net income and comprehensive income. At the end of a period, items of comprehensive income for that period are reported as accumulated other comprehensive income, a separate category of stockholders' equity.

Percent-Of-Sales Method (Income-Statement Approach)

Computes uncollectible-account expense as a percentage of net sales. Focuses on the amount of expense to be reported on the income statement.

Uncollectible-Account Expense (Doubtful-Account Expense / Bad-Debt Expense)

Cost to the seller of extending credit. Arises from the failure to collect from credit customers.

Trading Securities

Debt or equity investments that are to be sold in the near future with the intent of generating profits on the sale.

Unrealized Gain/Loss

Gains and losses that occur on investments through fluctuations in market values, rather than through sales.

Sales Return and Allowance

Merchandise returned for credit or refunds for services provided.

Receivables

Monetary claims against a business or an individual, acquired mainly by selling foods or services and by lending money.

Accounts Receivable Turnover

Net sales divided by average net accounts receivable.

Sales Discount

Percentage reduction of sales price by the seller as incentive for early payment before the due date. A typical way of expression is "2/10, n/30." This means the seller will grant a 2% discount if the invoice is paid within 10 days, and the entire amount is due within 30 days.

Days' Sales In Receivables

Ratio of average net accounts receivable to one day's sales. Indicated how many days' sales remain in Accounts Receivables awaiting collection.

Acid-Test Ratio (Quick Ratio)

Ratio of the sum of cash plus short-term investments plus net current receivables to total current liabilities. Tells whether the entity can pay all its current liabilities if they come due immediately.

Held-to-Maturity Securities

Securities in which the investor has the intent and ability to hold until a maturity date stated on the face of the security.

Available-For-Sale Securities

Securities that are not classified as held-to-maturity or trading securities.

Shipping Terms

Terms provided by the seller of merchandise that dictate the date on which title transfers to the buyer. A typical way to express shipping terms is through FOB terms. For example, "FOB destination" means title to the goods passes to the buyer when the goods are delivered and the buyer assumes control over them. "FOB shipping point" means title passes on the date the goods are shipped from the seller's warehouse.

Principle

The amount borrowed by a debtor and lent by a creditor.

Interest

The borrower's cost of renting money from a lender. Revenue for the lender and expense for the borrower.

Accumulated Other Comprehensive Income

The cumulative amount of items reported as other comprehensive income; a separate category in the stockholders' equity section of the balance sheet.

Maturity Date

The date on which the debtor must pay the note.

Allowance for Doubtful Accounts (Allowance for Uncollectible Accounts)

The estimated amount of collection losses.

Term

The length of time from inception to maturity.

Creditor

The party to whom money is owed.

Debtor

The party who owes money.

Maturity Value

The sum of principal and interest on the note.