Intermediate Accounting Chapter 7 Cash & Receivables

Front 1

ACCOUNTS RECEIVABLE

Back 1

Oral promises of the purchaser to pay for goods and services. They represent short-term extensions of credit, which are normally within 30 to 60 days.

Front 2

ACCOUNTS RECEIVABLE TURNOVER

Back 2

An activity ratio that measures the number of times, on average, a company collects receivables during a period. Computed by dividing net sales by average (net) accounts receivable outstanding during the year. Barring significant seasonal factors, average receivables outstanding can be computed from the beginning and ending balances of net trade receivables.

Front 3

AGING SCHEDULE

Back 3

A schedule (worksheet) that shows a company's accounts receivable and estimates uncollectible accounts by applying to various age categories by different percentages estimated to be uncollectible based on past experience. An aging schedule also identifies which accounts require special attention by indicating the extent to which certain accounts are past due.

Front 4

ALLOWANCE METHOD

Back 4

A method for recording uncollectible accounts receivable by entering the expense on an estimated basis in the accounting period in which the sales on account occur. The allowance method records bad debt expense in the same period as the sale and achieves a proper carrying value for accounts receivable. The FASB considers the collectability of receivables a loss contingency; thus, the allowance method is appropriate where it is probable that an asset has been impaired and when the amount of loss can be reasonably estimated.

Front 5

BANK RECONCILIATION

Back 5

A schedule explaining the differences between the bank's and the company's records of cash. If some part of the difference arises from items other than transactions not yet recorded by the bank, either the bank or the company must adjust its records.

Front 6

CASH

Back 6

Consists of coin, currency, and available funds on deposit at the bank, as well as negotiable instruments such as money orders, certified checks, cashier's checks, personal checks, and bank drafts. Cash, the most liquid of assets, is the standard medium of exchange and the basis for measuring all other items. Companies generally classify cash as a current asset.

Front 7

CASH DISCOUNTS

Back 7

Reductions from the sales price, offered by sellers to buyers to induce prompt payment. Also called sales discounts. Cash discounts generally read in terms such as 2/10, n/30 (2 percent if paid within 10 days, gross amount due in 30 days). Companies can account for sales discounts using either the gross or net method; most use the gross method, in which they record sales and related sales discount transactions by entering the receivable and sale at the gross amount and using a Sales Discount only when they receive payment within the discount period.

Front 8

CASH EQUIVALENTS

Back 8

Short-term, highly liquid investments are both (a) readily convertible to known amounts of cash, and (b) so near their maturity that they present insignificant risk of changes in value due to changes in interest rates. Generally, only investments with original maturities of three months or less quality under this definition. Examples are Treasury bill, commercial paper, and money market funds purchased with cash that is in excess of immediate needs.

Front 9

COMPENSATING BALANCES

Back 9

Minimum cash balances in checking or savings accounts, required by some banks and other lending institutions in support for existing borrowing arrangements. Companies must disclose in the financial statements the details of deposits held as compensating balances.

Front 10

DIRECT WRITE-OFF METHOD

Back 10

A method for recording uncollectible accounts receivable by recording the bad debt in the period in which a company determines that it cannot collect a specific receivable. This method is used for tax purposes in some jurisdictions, but is otherwise not usually considered appropriate because it usually does not result in the proper carrying value for accounts receivable.

Front 11

FACTORING RECEIVABLES

Back 11

Sales of receivables to factors, finance companies, or banks that buy receivables from businesses for a fee and then collect the remittances directly from the customers.

Front 12

FAIR VALUE OPTION

Back 12

The choice allowed by FASB to use fair value in the financial statements as the basis of measurement for financial assets and liabilities. Under the fair value option, the item is recorded at fair value at each reporting date, and unrealized holding gains or losses are reported as part of net income.

Front 13

FINANCIAL COMPONENTS APPROACH

Back 13

Used to record a sale with recourse, where each party to the sale only recognizes the assets and liabilities that it controls after the sale.

Front 14

IMPAIRMENT

Back 14

When a loss event has a negative impact on the future cash flows to be received from the customer.

Front 15

IMPREST SYSTEM FOR PETTY CASH

Back 15

A method of control for disbursements of petty cash. The company establishes a petty cash fund, controlled by the petty cash custodian, who pays out cash from the fund for amounts up to a certain pre-set limit. When the cash in the fund runs low, the custodian presents a request for reimbursement of the fund, supported by receipts as evidence of fund disbursement. Petty cash transactions are recorded in the accounting records when the fund is established and when it is replenished, but not in the interim. Companies use the account Cash Over and Short to record any errors that occur in the petty cash fund.

Front 16

IMPUTED INTEREST RATE

Back 16

An approximated interest rate, used when a company cannot determine the interest rate of a note receivable because it has no ready market. To estimate the present value of the note, the company approximates an applicable interest rate, which may differ from the stated interest rate.

Front 17

NET REALIZABLE VALUE

Back 17

The net amount the company expects to receive in cash.

Front 18

NONTRADE RECEIVABLES

Back 18

Claims that arise from a variety of nonsales transactions. Examples include advances to officers and employees or to subsidiaries; dividends and interest receivable; deposits paid to cover potential damages or losses or as a guarantee of performance or payment; and claims against insurance companies for casualties sustained, defendants under suit, governmental bodies for tax refunds, common carriers for damaged or lost goods, creditors for returned, damaged, or lost goods, and customers for returnable items.

Front 19

NOTES RECEIVABLE

Back 19

Written promises to pay a certain sum of money on a specified future date. Notes receivable may arise from sales, financing, or other transactions and may be short-term or long-term.

Front 20

NOT-SUFFICIENT-FUNDS (NSF) CHECKS

Back 20

A charge recorded by a bank against a depositor's balance for a check written for more than the amount of funds in the depositor's account.

Front 21

PERCENTAGE-OF-RECEIVABLES APPROACH

Back 21

A method of determining bad debt expense, by simply reporting receivables in the balance sheet at net realizable value. Also referred to as the balance sheet approach. This approach gives a reasonably accurate estimate of the receivables' realizable value, but it does not match cost and revenues. Companies may apply this method using one composite rate that reflects an estimate of the uncollectible receivables, or they may set up an aging schedule for particular account categories.

Front 22

PERCENTAGE-OF-SALES APPROACH

Back 22

A method of determining bad debt expense, in which a company converts the relationship between previous years' credit sales and bad debts into a percentage and uses that percentage to determine the current year's bad debt expense. To use this method, there must be a fairly stable relationship between previous years' credit sales and bad debts. Because it relates the charge to the period in which a company records the sale, this method matches costs with revenues. Also referred to as the income statement approach.

Front 23

PROMISSORY NOTE

Back 23

A written promise to pay a certain sum of money at a specific future date, in support of a note receivable.

Front 24

RECEIVABLES

Back 24

Claims held against customers and others for money, goods, or services. Companies classify receivables as either current (short-term, for which collection is expected within a year or the current operating cycle) or noncurrent (long-term). Receivables are further classified in the balance sheet as either trade or nontrade receivables.

Front 25

RESTRICTED CASH

Back 25

Material amounts of cash set aside for a particular purpose. Companies segregate restricted cash from “regular” cash for reporting purposes, and they classify restricted cash either in the current assets or in the noncurrent assets section, depending on the date of availability or disbursement.

Front 26

SALES DISCOUNTS

Back 26

Reductions from the sales price, offered by sellers to buyers to induce prompt payment. Also called cash discounts. Cash discounts generally read in terms such as 2/10, n/30 (2 percent if paid within 10 days, gross amount due in 30 days). Companies can account for sales discounts using either the gross or the net method; most use the gross method, in which they record sales and related sales discount transactions by entering the receivable and sale at the gross amount and using a Sales Discount account only when they receive payment within the discount period.

Front 27

SECURITIZATION

Back 27

Procedure in the sale (transfer) of receivables that takes a pool of receivables and sells shares in these pools of interest and principal payments, in effect creating securities backed by these pools of assets. Virtually every asset with a payment stream and a long-term payment history is a candidate for securitization.

Front 28

TRADE DISCOUNTS

Back 28

Reductions in sales prices, which companies use to avoid frequent changes in catalogs, to alter prices for different quantities purchased, or to hide the true invoice price from competitors. Trade discounts are commonly quoted in percentages.

Front 29

TRADE RECEIVABLES

Back 29

Accounts receivable and notes receivable that result from sales transactions for a company's goods or services. Trade receivables are usually the most significant type of receivable a company possesses.

Front 30

UNREALIZED HOLDING GAIN OR LOSS

Back 30

The net change in the fair value of a receivable from one period to another, exclusive of interest revenue recognized but not recorded.

Front 31

WITHOUT RECOURSE

Back 31

A receivables-factoring transaction in which the purchaser assumes the risk of collectibility and absorbs any credit losses. The transfer of receivables in such a transaction is an outright sale of the receivables both in form (transfer of title) and substance (transfer of control).

Front 32

WITH RECOURSE

Back 32

A receivables-factoring transaction in which the seller guarantees payment to the purchaser if the debtor fails to pay. If the seller transfers control of the receivables, it may recognize a liabilities for the guarantee after the sale.

Front 33

ZERO-INTEREST-BEARING NOTES

Back 33

A note receivable that includes interest as part of the face amount. Also called non-interest-bearing notes.