ACCT ch 5

When the current ratio falls below, the consequences are:

1) The lender can call the loan for immediate payment 2) If the borrower cannot pay, then the lender may take over the company

How does one increase their current ratio?

1)Launch major sales effort 2) Pay off some current liabilities before year-end.

A typical sales discount incentive might be stated as follows

2/10, n/30

available-for-sales security

A debt or equity security that is purchased with the intent of selling before it reaches maturity, or selling prior to a lengthy time period in the event the security does not have a maturity. Accounting standards necessitate that companies classify any investments in debt or equity securities when they are purchased

Held-to-maturity security

A held to maturity security is a debt or equity security that is purchased with the intention of holding the investment to maturity.

Unrealized losses are

A loss that results from holding onto an asset after it has decreased in price, rather than selling it and realizing the loss. An investor may prefer to let a loss go unrealized in the hope that the asset will eventually recover in price.

Unrealized gains are

A profit that exists on paper, resulting from any type of investment. An unrealized gain is a profitable position that has yet to be cashed in.

Which of the following is a correct statement regarding the direct write-off method

A) Companies are required to use the direct write-off method for federal income purposes B)A company records the uncollectible-account expense when it writes off an individual account receivable

Two major types of receivables are

A/R and N/R

The net realizable value of A/R is the difference between A/R and

Allowance for uncollectible accounts

The allowance methods records uncollectible -account expense

At the end of the accounting period

Short-term investments are

CURRENT ASSETS. They show up on the balance sheet immediately after cash, because of their liquidity.

Current Ratio

Current Ratio = TCA divided by TCL (TCA/TCL)

Selling credit Benefit:

Customers who cannot pay cash immediately can buy on credit, so sales and profits increase

The Last Bank lends money to a customer on a six month note. The bank accrues interest on the note at the end of the year. The journal entry on the books of the bank would include a

Debit to Interest Receivable and a Credit to Interest Revenue

If a buyer takes advantage of sales discount, the journal entry recorded by the seller will include

Debit to cash and a debit to sales discount

Because it includes only cash and short-term investments in the numerator, the current ratio is a more stringent measure of a firm's ability to pay current liabilities than the quick ratio

FALSE

Companies are prohibited from combining the percent -of sales and the aging methods when estimating uncollectible accounts.

FALSE

Ratios are used only by company management, and not investors, to evaluate the financial health of the company

FALSE

The A/R account in the general ledger has a separate account for each customer

FALSE

The creditor has a note payable

FALSE

The maturity value of a note is the sum of the principal amount of a note less the interest due at maturity

FALSE

The two major types of receivables are Accounts receivables and trade receivables.

FALSE

finding net revenue goes:

Gross revenue minus sales discounts minus sales returns and allowances = net revenue

The entry to write off an account under the allowance method for estimating uncollectible accounts:

Has no effect on total assets or net income

The entry to record accrued interest on a note receivable at year end includes a debit to

Interest receivable

When calculating the denominator for the quick ratio, you would not include:

Long-term debt

Hunter's Nest had net sales for the current period of $310,000 and average receivables were $28,700. What is Hunter's Nest's average daily sales?

Net sales for current period divided by 365=Net average of daily sales 310,000 divided by 365 = 849

Formal monetary claims against others acquired mainly by lending money are:

Notes receivable

Trading investments are items that are reported on the income statement as

Other revenue, gains, and losses.

When goods are shipped FOB destination

Ownership changes hands and revenue is recognized at the point of delivery to the customer.

Which of the following is considered to be a more stringent measure of a company's ability to pay its current liabilities than the current ratio

Quick ratio

Accounts receivable are shown on the balance sheet at their net realizable value.

TRUE

By selling on credit, companies run the risk of not collecting some receivables.

TRUE

In order to effectively evaluate the days' sales in receivables, it should be compared to the company's credit terms

TRUE

Sales discounts and sales returns and allowances are deducted from gross revenue to determine net revenue

TRUE

Selling on credit creates both a benefit and a cost

TRUE

The principal amount of the note is the amount borrowed by the debtor.

TRUE

The quick ratio helps to measure a company's liquidity

TRUE

Uncollectible-account expense is an operating expense on the income statement.

TRUE

Net realizable value:

The amount a company DOES expect to realize in cash receipts

Selling credit Cost:

The company cannot collect from some customers.

There are two parties to a note and:

The creditor has a note receivable and the debtor has a note payable

When a note matures

The debtor must pay the creditor the maturity value of the note

Most companies will use

The percent-of-sales method for interim statements ad the age-of-receivables method at the end of the year

Shipping terms is the point in the contract that determines

The proper time to recognize sales revenue, and when ownership of goods changes hands between the seller and the buyer.

2/10, n/30 means

This means that the seller is willing to discount the order by 2% if the buyer pays the invoice within 10 days. After that time, the seller withdraws the discount offer. Regardless the buyer must pay within 30 days.

If a company receives a note receivable on account

Total assets will remain the same

The allowance for uncollectible accounts normally has a credit balance.

True

A business offers credit terms of 1/15, n/30. These terms indicate that

a discount of 1% can be taken if the invoice is paid within 15 days

the word "net" implies that

a small amount has been subtracted from total accounts and notes receivable.

Companies also keep a subsidiary record of

accounts receivable with a separate account for each customer.

To measure uncollectible-account expense, accountants use the

allowance method or, in some cases the direct write off

The amount of revenue to be recognized is the

cash value of the goods or services transferred from the seller to the buyer

A/R which are

current assets, sometimes called trade receivables or just receivables.

Held-to-maturity security is recognized as

debt security

Companies with plenty of cash often take advantage of

early payment discounts on their purchases, thus adding to their reported profits and cash flows

Revenue is recognized when it is

earned

Other receivables is a miscellaneous category

for all receivables other than accounts receivable and notes receivable. (loans to employees and to related companies)

Sales Discounts

for early payment in order to speed up cash flow

The note may require the borrower to pledge security

for the loan, meaning the borrower gives the lender permission to claim certain assets, called collateral if the borrower fails to pay the amount due.

Notes receivable are more

formal contracts than accounts receivable

For a note, the borrower signs a written promise to pay the lender a definite sum at the

maturity date, plus interest. Also why they are called promissory notes.

Receivables are

monetary claims against others. They are acquired mainly by selling goods and services (A/R) and by lending money (N/R).

When goods are shipped FOB (free on board) shipping point,

ownership changes hands and revenue is recognized at the point when the goods leave the seller's shipping dock.

Fair value is the amount the investor can

receive by selling the securities.

Sales returns and allowances

retailers and consumers have a right to return unsatisfactory or damaged merchandise for a refund or exchange.

The A/R account in the general ledger serves as a control account

that summarizes the total amount receivable from all customers

Fair market value is

the amount for which the owner can sell the securities

ABC company has shipped goods to one of its customer FOB shipping point ABC company will recognize revenue when

the customer pays the invoice

A realized gain or loss occurs ONLY when

the investor sells an investment.

Basis for accounts and notes receivable are

the principles of revenue recognition

Realized gain is

the sale price is greater than the investment carrying amount

Realized loss is

the sale price is less than the investment carrying amount

It takes good judgement including ethics

to become a successful accountant

Trading Securities

to hold for a short time and sell it for more than its cost.

Accountants label the selling credit cost

uncollectible-account expense, doubtful-account expense, or bad-debt expense.

Under the allowance method, when an account receivable is written off, the journal entry

will have no effect on net accounts receivable