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Int. Acct. I
Chapter 6: Cash and Receivables
| Term | Definition |
|---|---|
| liquidity | an indication of how quickly an enterprise's assets can be converted to cash |
| cash | the most liquid of assets, is the standard medium of exchange and the basis for measuring and accounting for all other items. |
| restricted cash | held by a company for a specific purpose and is therefore not available for immediate general use |
| compensating balance | a minimum balance that must be maintained in a bank account, which is used to offset the cost incurred by the bank to set up a loan |
| bank overdrafts | occur when a company writes a check for more than the amount in its cash account |
| receivables | (often referred to as loans and receivables) are claims held against customers and others for money, goods, or services; classified as trade or nontrade |
| trade receivables | an amount owed by customers for bought or services rendered; either accounts receivable or notes receivable |
| accounts receivable | relate to sales of goods and services on credit; open accounts resulting from short-term extensions of credit; normally collected within 30 to 60 days |
| notes receivable | relate to sales of goods and services on credit (with longer payment terms) and cash loans to others. |
| nontrade receivables | relate to loans made outside the normal course of business |
| transaction price | he amount of consideration that a company expects to receive from a customer in exchange for transferring goods or services |
| trade discounts | reductions from the list price |
| cash discounts (sales discounts) | inducements of prompt payment |
| gross method | sales and receivables are recorded at the gross amount. (More practical!) Recognizes the receivable and related revenue at the invoice price. |
| net method | sales and receivables are recorded at the net amount; recognizes the accounts receivable and related revenue at the invoice price less the cash discount. |
| direct write-off method | a company determines a particular account to be uncollectible, it charges the loss to Bad Debt Expense |
| allowance method | involves estimating uncollectible accounts at the end of each period for bad debts |
| composite rate | percentage, that reflects an estimate of the uncollectible receivables |
| current expected credit loss (CECL) model | requires companies to measure expected uncollectible accounts and record bad debt expense on all receivables |
| factors | companies that buy receivables for a fee and then collect the payments directly from customers |
| sale without recourse | this means that the factor assumes the credit-risk of some customers not paying their accounts receivable balance. |
| sale with recourse | this means that if a receivable becomes uncollectible, you will be responsible |
| specific assignment (assigning) | the lender assigns its rights relating to a facility agreement (loan agreement). |
| general assignment (pledging) | Under a pledge, the assigned receivables remain under control of the borrower. |
| accounts receivable turnover | a financial ratio to evaluate the liquidity of a company's accounts receivable; measures the number of times, on average, a company collects receivables during the period; net sales/avg. net A/R |
| average days to collect receivables | 365/accounts receivable turnover |
| promissory note | a written promise to pay a certain sum of money at a specific future date |
| maker | the party or person who signs the notes, borrows the money, and promises to pay it back at a certain time; payer |
| payee | the person who is to receive the payment; may legally and readily sell or otherwise transfer the note to others |
| face value | amount due from the borrower to the lender at the end of the loan; stated in the debt contract |
| stated interest rate | interest rate stated in the debt contract; represents the cash rate of interest paid by the borrower |
| cash interest | amount of cash interest received by the lender from the borrower at each interest date; = Face Value x Stated Interest Rate |
| present value | discounted future cash flow using the effective rate at the issuance of the loan; Balance Sheet value or net carrying value of the note |
| effective (market) interest rate | interest rate based on the borrower’s economic cost of borrowing; referred to as the discount rate used to determine present value |
| interest revenue | amount of interest earned by the lender each accounting period based = Net Carrying Value x Effective Interest Rate |
| premium on notes receivable | occurs when the lender is receiving more cash interest than it should be from the borrower, based on the borrower’s effective rate of borrowing; Stated Rate > Effective Rate |
| discount on notes receivable | occurs when the lender is receiving less cash interest than it should be from the borrower, based on the borrower’s effective rate of borrowing; Stated Rate < Effective Rate |
| note at face value | Stated Rate = Effective Rate |
| effective interest method | the amortization or writing off of any discount or premium over time and recognizes interest revenue at the effective interest rate |
| discount on notes receivable | valuation account; contra asset to notes receivable |
| implicit interest rate | the calculated rate between the future value divided by the present value of the note |
| imputation | the process of interest-rate approximation |
| imputed interest rate | the process of interest-rate approximation thus resulting in a rate |
Created by:
ryanriggs18
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