Chapter #7 - Cash, Accounts Receivable And Bad Debt Expense

Front 1

What are the three steps in the percentage of sale approach to calculating bad debt expense?

Back 1

See above

Front 2

How do you use the aging of accounts receivable approach?

Back 2

See above

Front 3

What are the steps in preparing a bank reconciliation?

Back 3

See above

Front 4

What is an accounts receivable?

Back 4

Accounts receivable is a current asset that arises from sales on credit of goods and services to a customer; the total customers owe a firm. It is also called trade receivables.

Front 5

What Accounts Receivable amount is shown on the balance sheet?

Back 5

When a firm reports Accounts Receivable on its balance sheet, the amount must be what the firm expects to collect. This amount is called net realizable value.

Front 6

What is the allowance method of accounting for bad debts?

Back 6

The allowance method is a method of accounting for bad debts in which the amount of uncollectible accounts is estimated at the end of each accounting period.

Front 7

What is bad debt expense?

Back 7

Bad debt expense is the expense to record uncollectible accounts receivable

Front 8

Describe the percentage of sales method for accounting for bad debts.

Back 8

Percentage of sales method. This method focuses on the income statement and the amount of the current period’s sales for which collection will not be made.

Front 9

Describe the Aging of Accounts Receivalbe method of accounting for bad debts.

Back 9

Aging of account receivable method. This method focuses on the balance sheet. It calculates the total amount needed to get the balance in the Allowance for Uncollectible Accounts to the amount that needs to be subtracted from Accounts Receivable to make it equal to net realizable value.

Front 10

What is an aging schedule?

Back 10

An aging schedule is an analyses of the amounts owed to a firm by the length of time they have been outstanding.

Front 11

Describe the driect write-off method of accounting for bad debts.

Back 11

The direct write-off method is a method of accounting for bad debts in which they are written off – booked as bad debt expense – in the period in which they are identified as uncollectible. This method does not follow GAAP.

Front 12

What is a promissory note?

Back 12

A promissory note is a written promise to pay a specific amount of money on demand or at a particular time.

Front 13

Who is the maker of a promissory note?

Back 13

Maker – the person or firm making the promise to pay a promissory note.

Front 14

Who is the payee of a promissory note?

Back 14

Payee – the person or firm receiving the payment from a promissory note.

Front 15

How is a notes receivable created?

Back 15

Notes receivable are often created when a firm will renegotiate an overdue account by allowing a customer to sign a promissory note giving the customer more time to pay and charging interest on the loan.

Front 16

What is the formular for calculating interest?

Back 16

The formula for calculating interest is: principal x interest rate x time.

Front 17

What is a key control of cash?

Back 17

A key control of cash is segregation of duties.

Front 18

What is a bank statement?

Back 18

A bank statement is a summary of the activity in a bank account sent each month to the account owner.

Front 19

What are the terms used for assets that will last for more than one accounting period?

Back 19

Long-term assets, fixed assets, long-lived assets, and operating assets are used to describe assets that will be used for more than one accounting period.

Front 20

What is a tangible asset?

Back 20

Tangible assets – assets with physical substance – they can be seen and touched.

Front 21

What is an intangible asset?

Back 21

Intangible assets – rights, privileges, or benefits that result from owning long-lived assets that do not have physical substance.

Front 22

Describe a basket purchase.

Back 22

A basket purchase is when two or more assets are acquired for a single price. A separate cost must be calculated for each asset using a relative fair market method. It is based on the assets’ individual market values.

Front 23

What does the term capitalizing mean?

Back 23

Capitalizing is recording a cost on the balance sheet as an asset rather than recording it as an expense.

Front 24

What does the term depreciataion mean?

Back 24

Depreciation is the systematic allocation process to recognize the expense of long-term assets over the period in which the assets are used.

Front 25

What does the term amortization mean?

Back 25

Amortization is the write-off of the cost of a long-term asset over more than one accounting period.

Front 26

Define depletion.

Back 26

Depletion is the amortization of a natural resource.

Front 27

Name the three common methods of calculating depreciation.

Back 27

Accountants use three common methods of depreciation for the financial statements: They are Straight-line depreciation, declining balance depreciation and the activity (units of production) method of depreciation

Front 28

Describe straight-line depreciation.

Back 28

Straight-line depreciation
Straight-line depreciation is the method of depreciation in which equal amount of the cost of an asset are written off each year.
Depreciation expense = Acquisition cost – Salvage value divided by the estimated useful life in years.

Front 29

Describe activity (or units of production) depreciation.

Back 29

Activity (units of production) depreciation
Activity depreciation is the method of depreciation in which the useful life is expressed in terms of the total units of activity or production expected from the asset and the asset is written off in proportion to its activity during the accounting period.
Depreciation rate = acquisition cost – residual value divided by the estimated useful life in activity units.
Depreciation expense = depreciation rate times the actual activity level for the year.

Front 30

Describe declining balance depreciation.

Back 30

Declining Balance Depreciation
Declining balance depreciation is an accelerated depreciation method.
Accelerated depreciation – methods in which larger amounts of the cost of an asset are written off early in the life off an asset and smaller amounts are written off later in the life of an asset.
Depreciation expense = existing book value times (2/estimated useful life in years)

Front 31

What is amortization?

Back 31

Amortization is the write-off of the cost of a long-term asset over more than one accounting period.

Front 32

What is depletion?

Back 32

Depletion is the amortization of a natural resource.

Front 33

What does depletion apply to?

Back 33

Depletion applies to the writing off of the cost of natural resources such as oil wells and mines.
Depletion cost per unit = the cost of the natural resources less any residual value divided by the estimated units of activity.
Depletion expense = depletion cost times the units pumped, mined, or cut per period

Front 34

What is a copyright?

Back 34

Copyrights are a form of legal protection for authors of “original works of ownership” provided by U.S. law. Copyrights are amortized over their legal life, or useful life, whichever is smaller.

Front 35

What is a patent?

Back 35

Patents are property rights that the U.S. government grants to an inventor “to exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States” for a specific period of time. Patents are amortized over their useful life, or legal life, whichever is shorter.

Front 36

What is a trademark?

Back 36

Trademarks are symbols, words, phrases, or logos that legally distinguish one company’s product over any others. Trademarks are not amortized because the useful lives are indefinite.

Front 37

Describe a franchise.

Back 37

Franchises are agreements that authorize someone to sell or distribute a company’s goods or services in a certain area. The franchise fee is amortized over the life of the franchise.

Front 38

When (and how) is goodwill created?

Back 38

Goodwill is the excess cost over market value of the net assets when one company purchases another company. Goodwill is not amortized as it is assumed to have an indefinite life. It may be impaired and its value decreased under certain circumstances.

Front 39

How are research and development costs accounted for?

Back 39

Research and Development (R&D) costs are expensed and not capitalized because it is not clear these costs represent.

Front 40

What does the term impairment mean?

Back 40

Impairment is a permanent reduction in market value of an asset below its book value.

Front 41

What is a capital expenditure?

Back 41

Capital expenditures are costs that will be recorded as assets, not expenses, at the time they are incurred. Examples include remodeling and improvements.

Front 42

Describe an ordinary repair.

Back 42

Ordinary repairs are expensed as they are routine and do not increase the useful life of the asset or its efficiency.

Front 43

How are revisions of useful lives of capital assets accounted for?

Back 43

Sometimes revisions of useful lives and/or residual values must be made after an asset has been used. This is not treated as an error. The un-depreciated balance less the revised estimated residual value is spread over the remaining useful life.

Front 44

What does the return on assets ratio tell us?

Back 44

Return on assets is a ratio that measures how well a company is using its assets to generate revenue. It is calculated by adding net income and interest expense and then dividing that sum by average total assets.

Front 45

What does the asset turnover ratio tell us?

Back 45

Asset turnover ratio measures how efficiently a company is using its assets. It is calculated by dividing net sales by average total assets.
A significant risk to long-term assets is that someone will steal one of those assets. Physical controls, such as locks, video camera, and security guards can be effective. Safeguarding assets through complete and reliable record keeping is also beneficial.

Front 46

Name five depreciation terms.

Back 46

See above

Front 47

What costs are capitalized with a long term asset?

Back 47

See above

Front 48

How do you calculate a gain or loss on disposal of a capital asset?

Back 48

See above.