Finance Chapter 5

receivable

a claim to receive cash in the future

Matching Principle

the direct write off method is normally not permitted for U.S GAAP reporting because it violates

Net Revenues

total revenues less discounts, returns and allowances

classified as receivables

- amounts owed by customers -amounts loaned and expected to be repaid -tax refund claims

Disadvantages of extending credit to customers

-Accounts that are uncollectible -Delays in collecting accounts

Claire provides $100 of services to customers on account with the term 2/10, n/30. The service revenue account is credited for $100. If the customer pays within 10 days, Claire will record which of the following

-Debit cash $98 -Debit Sales Discount $2 -Credit Account Receivable $100

Two entries are required when a previously written off account is paid. These two entries include

-Record the collection on the account receivable -reinstate the account receivable

average collection period

-another way to express the same effeciency measure -It is calculated as 365 days divided by the receivables turnover ratio

two conditions exist for a sale and related receivable to be recognized

-collection from the customer is reasonably assured - the earnings process is virtually complete

sales to customer in which the customers pay within 30 to 60 days refer to

-credit sales -sales on account

ABC Corp Received a 3 month, 8%, $1500 note receivable on November 1, the adjustment for interest earned by December 31 will include

-credit to Interest Revenue of $20

Adrian Corp. sells goods on account for $100,000 on May 1. The customer paid for the goods on May 10. On May 15, the customer returns 40,000 of the merchandise. The entry Adrian makes on May 15 includes

-debit to Sales Return -Credit to Cash

Receivable turnover ratio

-the number of times during a year that the average account receivable balance is collected -Net credit sales/ average account receivables

A trade discount reduction from the list price is used for

1. change prices without publishing a new catalog 2. Disguise real prices from competitors 3. give quantity discounts to customers

Interest

Face Value x Annual Interest Rate x Fraction of the year

Note Receivable

Formal credit arrangement between borrower and lender

Notes Receivable

formal credit arrangement between a creditor and debtor

Account Receivables

informal credit agreement with trade customers

which method of accounting requires recognizing bad debt expense when it is determined that the customer cannot pay

-direct write off method

Classified As Receivables

-interest due from loans to customers -loans by a company to other entities

Which information regarding the receivable turnover ratio is true?

-it shows the number of times during a period that the average account receivable balance is collected -It provides an indication of a company's efficiency in collecting receivables

Credit Sale

when a business sells goods to a customer and the customer promises to pay later

Sales Return

when a customer returns a product for a refund, the account entry recorded