ACCT 3311 Chapter 7
Intermediate Accounting 14th edition Kieso Weygandt & Warfield
Terms in this set (33)
Oral promises of the purchaser to pay for goods and services sold. They represent short-term extensions of credit, which are normally collected within 30 to 60 days.
A schedule (worksheet or spreadsheet) that shows a company's accounts receivable and estimates uncollectible accounts by applying to the various age categories 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.
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, thus properly matching expenses and revenues and achieving a proper carrying value for accounts receivable. The FASB considers the allowance method appropriate in situations where it is probable that an asset has been impaired and that the amount of the loss can be reasonably estimated.
Occur when a company writes a check for more than the amount in its cash account. Companies should report bank overdrafts in the current liabilities section, adding them to the amount reported as accounts payable. If material, companies should disclose these items separately.
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.
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 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.
Short-term, highly liquid investments that are both: (a) readily convertible to known amounts of cash, and (b) so near their maturity that they present insignificant risk of changes in interest rates. Generally, only investments with original maturities of three months or less qualify under this definition. Examples are Treasury bills, commercial paper, and money market funds purchased with cash that is in excess of immediate needs.
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.
direct write-off method
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. The direct write-off method is used for tax purposes but is otherwise not usually considered appropriate because it usually does not result in the proper carrying value for accounts receivable and it fails to match costs with revenues of the period.
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.
fair value option
The choice allowed by the 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.
financial components approach
Approach used for sales of receivables with recourse (in which the seller guarantees payment to the purchaser in the event the debtor fails to pay). In this approach, each party to the sale recognizes only the assets and liabilities that it controls after the sale.
imputed interest rate (notes receivable)
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.
net realizable value (receivables)
The net amount that companies expect to receive in cash for short-term receivables. Companies estimate both uncollectible receivables and any returns or allowances to be granted in order to determine net realizable value, which they report in the financial statements.
Claims that arise from a variety of non-sales 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.
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.
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.
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.
A written promise to pay a certain sum of money at a specific future date, in support of a note receivable.
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.
receivables turnover ratio
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.
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 long-term assets section, depending on the date of availability or disbursement.
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.
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.
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.
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.
A receivables-factoring transaction in which the seller guarantees payment to the purchaser if the debtor fails to pay. The seller records this transaction using a financial components approach, in which each party to the sale recognizes only the assets and liabilities that it controls after the sale.
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).
A note receivable that includes interest as part of the face amount. Also called noninterest-bearing notes.
A schedule explaining any 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.
imprest system for petty cash
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.
not-sufficient-funds (NSF) checks
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.
when a loss event has a negative impact on the future cash flows to be received from the customer