Financial accounting ch. 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 . 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.

other comprehensive income

Certain types of revenue, expenses, gains, and losses that are allowed to bypass the income statement. These 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

Computes uncollectible-account expense as a percentage of net sales. Also called the income-statement approach because it focuses on the amount of expense to be reported on the income statement.

uncollectible-account expense

Cost to the seller of extending credit. Arises from the failure to collect from credit customers. Also called doubtful-account expense or bad-debt expense.

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 loss/gain

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 goods 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 an incentive for early payment before the due date. A typical way to express sales discount 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. Indicates how many days' sales remain in Accounts Receivable awaiting collection. Also called the collection period.

acid-test ratio

Rtio 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. Also called the quick ratio.

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-sales 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.

principal

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

interest

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

Allowance for Uncollectible Accounts

The estimated amount of collection losses. Another name for Allowance for Doubtful Accounts.

terms

The length of time from inception to maturity.

creditor

The party to whom money is owed.

debitor

The party who owes money

maturity value

The sum of principal and interest on the note.

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.