ACC 131 chapter 5

principal

amount borrowed

accounts receivable

does not have a formal note

for the buyer

it is a reduction to the cost of the goods and services

one of the most widely used asset management ratios is

accounts receivable turnover

sales revenue is such a key component of a company's success

analysts are interested in a large number of ratios that incorporate sales

the factor the buyer of the receivables acquires the right to

collect the receivables and the risk of not being able to collect

the issuer of the credit card pays the seller the amount of each sale less a service charge on the date of purchase and then

collects the full amount of the sale from the buyer at some later date

3 changes to sales revenue includes

discounts returns and allowances

allowance for doubtful accounts

established for the estimate of potentially uncollectible accounts

interest

excess of the total amount of money collected over the amount borrowed

increasingly common practice is to

factor or sell receivables

net sales = total credit sales - sales discounts - sales returns and allowance (T/F)

false

the longer a customer's account balance remains outstanding the greater the likelihood that it will be collected in the near future (T/F)

false

under the allowance method of accounting for bad debts the company estimates the amount of bad debts before those debts actually occur (T/F)

false

appropriate amount of revenue to recognize is

generally the cash received or the cash equivalent of the receivable

gross profit margin calculation

gross profit margin = gross profit / net sales

3 common profitability ratios

gross profit margin, operating margin, and net profit margin

asset management

how efficiently a company is using the resources at its disposal

interest calculation

interest = principal x annual interest rate x fraction of one year

period of a note or the time value of money

interest can be considered compensation paid to the lender for giving up the use of resources

securitization occurs when

large businesses and financial institutions frequently package factored receivables as financial instruments or securities and sell them to investors

profitability ratios attempt to

measure the return the company is earning on sales

net profit margin calculation

net profit margin = net income / net sales

GAAP requires accounts receivable to be shown at their

net realizable value which is the amount of cash the company expects to collect

in a typical factoring arrangement the sellers of the receivables have

no continuing responsibility for their collection

notes receivable

note is a legal document given by a borrower to a lender stating the timing of repayment and the amount to be repaid

sales allowance

offered by seller if the goods or services are unsatisfactory to the customer or if the product arrives late

accrual basis accounting recognizes revenue when it is

realized which means non-cash resources or inventory have been exchanged for cash or near cash and earned which means earnings process is substantially complete

notes receivable

receivables that generally specify an interest rate and a maturity date at which an interest and principal must be repaid

a trade discount

reduction in the selling price granted by the seller to a particular class of customers

contra revenue

sales return and allowances used to record the price reduction

merchandise or goods returned by the customer to the seller are

sales returns and are also recorded in the sales returns and allowances account

which documents are prepared based on the order document

shipping and billing

for the seller

the cash is more quickly available and collected costs are reduced

2 methods to record bad debt expense

the direct write off method and the allowance method

a debit card authorizes a bank to make an immediate electronic withdrawal from

the holder's bank account (debit)

at the end of each accounting period

the individual accounts receivable are categorized by age

why do analysts like to look at the operating margin and net profit margin percentages

to see how much is left from a sales dollar after paying for the product and all its operations

estimated bad debt expense equals

total credit sales x percentage of credit sales estimated to default

debit cards are disadvantageous to the card holder since

transactions cannot be rescinded by stopping payment

a primary advantage of the allowance method to account for bad debts is that it supports the matching principle (T/F)

true

accounts receivable are shown on the balance sheet at their net realizable value (T/F)

true

because the allowance method results in better matching accounting standards require its use rather than the direct write-off method unless bad debts are immaterial (T/F)

true

for sales revenues internal controls involved the following

accounting for a sale begins with the receipt of purchase order or some similar document is necessary for the buyer to be obligated to accept or pay for the ordered goods

accounts receivable turnover calculation

accounts receivable turnover = net sales / average net accounts receivable

allowance method

bad debt expense is recorded in the period of sale which allows it to be properly matched with revenues according to the matching concept

special form of factoring

bank credit cards such as visa and master card

invoices

billing documents

current and noncurrent receivables

both accounts and notes receivable can be classified as current, most accounts receivables are due within one year but notes receivable can be both, and if it is due beyond one year it will be classified as noncurrent

operating margin calculation

operating margin = operating income / net sale

a sale and its associated receivable are recorded only when the

order, shipping, and billing documents are all present

2 methods commonly used to estimate bad debt expenses are

percentage of credit sales method and the aging method

when receivables are factored the seller

receives an immediate cash payment reduced by the factor's fees

debit cards are advantageous to bank and merchants through

reduced transaction processing costs

quantity discount

reduction in the selling price granted by the seller because selling costs per unit are less when larger quantities are ordered

encourage promp payment businesses may offer a sales discount

reduction of the normal selling price and is attractive to both the seller and the buyer

bad debt expense

when customers do not pay their accounts recivable