Help
Options
Didn't know it?
click below
click below
Knew it?
click below
click below
Don't Know
Remaining cards (0)
Know
retry
shuffle
restart
0:00
Embed Code - If you would like this activity on your web page, copy the script below and paste it into your web page.
Normal Size Small Size show me how
Normal Size Small Size show me how
ACCT351 (ch.5)
Cash and Receivables
| Question | Answer |
|---|---|
| can cash be reported as a long-term asset? | yes it can if it is designated for a specific purpose (i.e. plant expansion project, bond retirement fund, etc.) |
| how is petty cash reported? | classified as cash, even though set aside for a particular purpose |
| what is a compensating balance? | the minimum cash balance in a company's chequing/savings as support for a loan |
| how are restricted cash and compensating balances reported? | separately from cash, current or long term depending on the circumstances |
| how are foreign currencies reported? | in Canadian dollars based on exchange rate at reporting date |
| how are bank overdrafts reported? | netted against cash if there are other positive balances in the same bank (otherwise reported as a current liability) |
| what are cash equivalents? | short-term, highly liquid assets that can be converted into known amounts of cash, little risk of price fluxuations, and with maturity of 3 months or less at date of purchase |
| how are cash equivalents reported? | as fair value, together with cash (cash and cash equivalents) |
| what are the 3 policies mentioned that are used to lessen risk of uncollectible receivables? | - discounts for cash sales - discounts for faster payments of credit amounts owing - late payment interest charges for overdue accounts |
| what are the 2 key activities of receivables management? | - regular analysis of aged accounts receivable - regular scheduled assessments/follow-up on overdue accounts |
| what are trade receivables? | accounts receivable result from credit sales in normal course of business |
| in what time frame from the reporting date are A/R expected to be received? | one year |
| how are A/R measured? | net realizable value (amount expected to be received) |
| what 2 things affect the value of A/R? | - trade and sales discounts - sales returns and allowances |
| what is a trade discount? | offer of adjusted sales price from items listed in catalogue (cheaper than publishing a new catalogue) |
| what is a sales discount? | offered to encourage faster payments (1.5/10, n/30) *an estimate of highly probable sales discounts expected to be taken by customers must be included at time of sale |
| what is the net method of accounting for sales discount? | record transaction as if all of sales discount will be taken. Once cash collected, record sales discounts forfeited as a credit |
| what is the gross method of accounting for sales discount? | record transaction as if none of sales discount will be taken. Upon collection, record sales discounts as a debit |
| what methods are used to account for sales discounts in IFRS and ASPE? | IFRS: net method ASPE: choice between net and gross |
| what are the 4 methods to measure uncollectible receivables? | - percentage of A/R method - A/R aging method - credit sales method - mix of methods |
| how are estimates of uncollectible receivables recorded? | to AFDA balance with offsetting entry to bad debt expense |
| how is the percentage of A/R method applied? | closing A/R multiplied by % estimated as uncollectible |
| how is the A/R aging method applied? | - the older the uncollected amount, the more likely to be uncollectible - estimate % of uncollectible receivables for each aged group - aging schedules used to indicate credit risk for each group |
| how is the credit sales method applied? | - amount of credit sales multiplied by % management estimates to be uncollectible |
| what is the proper journal entry for write-offs of collectibles? | AFDA $---- A/R $---- |
| how do you record collection of a previously written off amount? | 1. reinstate the A/R amount being paid by reversing the previous write-off entry 2. record cash received as a collection of the A/R reinstated in first entry |
| what are the proper journal entries for collection of a previously written-off amount using the direct write-off method? | bad debt expense $---- AR (D. Kos) $---- when later collected: cash $---- bad debt expense recovered (D. Kos) $---- |
| who uses the direct write-off method for writing off receivables? | only smaller companies with few credit sales and A/R balances. Can only be used if uncollectible amounts are immaterial |
| what are the problems with the direct write-off method is collectibles are material? | - without AFDA estimate, net receivables would be recorded higher than net realizable value - write off of would likely occur in a different year than sale (non-compliance with matching principle) - opportunity to delay write-off and manipulate income |
| what is a note receivable? | an unconditional written promise to pay a specific sum of money on demand or on a defined future date, supported by a formal written promissory note |
| what are the two types of notes? | 1. interest-bearing 2. non-interest-bearing |
| what is an interest bearing note? | - stated rate of interest payable in addition to the face value of the note - cash payments can be interest-only with principle payable at end, or a mix depending on terms of note |
| are notes current or long-term items? | can be either (or a mix) depending on if they will be realized within a year of not |
| when/how should interest bearing notes be recognized? | at fair value on day note is legally executed (usually upon signing) |
| how should transaction costs be treated with notes? | they should be capitalized and amortized over the term of the note |
| how are long-term notes receivable measured? | amortized cost |
| what is an ordinary annuity? | fixed payments on a fixed basis over course of note (i.e. $1,000 at end of each year for 5 years |
| how do you calculate PV for an ordinary annuity? | calculate PV of annuity for each payment then sum them up |
| what is the difference when interest rate is lower than market rate? | a discount |
| what is the difference when interest rate is higher than market rate? | a premium |
| how do you calculate amortized cost for long-term notes receivable? | amount recognized upon acquisition (PV) + interest, less principle collections/receipts (can be blended for interest/principle) + amortization of discount (or - amortization of premium) - write downs for impairment if applicable |
| on what time basis are interest rates always for? | always annual |
| how must N/R longer than one year be recorded? | at it's PV based on: - interest rate of note (if interest-bearing) -receiving implicit interest rate (if non-interest bearing) |
| when must interest be accrued for long term N/R? | at every intervening year-end |
| what must be done do premiums and discounts on N/R | must be amortized (amortization calculated as difference between cash interest paid and calculated interest at effective rate) |
| how is implied interest calculated for zero-interest bearing notes? | - never actually zero interest - implied interest calculated from cash values lent and received which are both known |
| how is FV determined when a non-interest=bearing note is lent to an employee | FV is determined by using market rate for similar loans *difference between value of loan and FV should be recorded as compensation expense |
| when are notes receivable considered impaired? | when the holder of the receivable has a possibility of not collecting some or all of amounts owing |
| how are receivables measured after impairment happens? | they become measured at present value of currently expected cash flows at the loans original effective interest rate |
| what is the proper journal entry for impairment of notes receivable? | debit to bad debt expense credit to either allowance for uncollectible notes, or as a direct reduction to the asset account |
| what are the 2 ways that companies can shorten credit-cash cycles? | 1. secured borrowings 2. sale of receivables |
| what is secured borrowings with respect to receivables? | - using receivables as collateral for loan or bank LOC - receivables left on company books - if company defaults on loan, bank can seize receivables |
| what does it mean to default on a loan? | failure to fill obligations (i.e. repay) |
| what is a sale of receivables? | receivables are sold to third-party (used often with retailers that well high-cost goods like cars or gym equipment) |
| when are sales of receivables derecognized under IFRS and ASPE? | IFRS: all risks/rewards transferred (right to receive transferred, compy can't pledge A/R to third-parties) ASPE: control of receivables surrendered (assets isolated from transferer, factor has right to sell, transferor maintains no repurchase agreement) |
| what is factoring? | when individual A/R are sold/transferred to a recipient or factor in exchange for cash minus a fee called a discount *seller has no subsequent involvement with receivable and factor collects directly from customer |
| what are the downsides and risks to factoring? | - expensive (2%-3% fee for a 30 day receivable, equal to 25%-36% per year) - factors can go out of business while still owing company money |
| what are the upsides to factoring? | - factors are more likely to give funds compared to banks - factors more likely to share risk of receivables |
| what is a sale of receivable without recourse? | factor retains risks of receivables |
| what is a sale of receivables with recourse? | seller retains risk and guarantees payment for uncollectible receivables |
| how do the journal entries vary between sale with or without recourse? | sales with recourse must include a recourse liability as a credit, and an equal increase in loss on sale of receivables as a debit |
| what is a holdback? | a percentage of cash kept by factor to protect themselves from credit risk (expressed as "due from factor" as a debit) |
| who record a recourse liability? | only the seller, not the factor |
| what is securitization of receivables? | a financing transaction that gives companies an alternative way to raise funds other than issuing debt |
| what is the general process of securitization of receivables? | - receivables sold to a holding company called a special purpose entity (SPE) which is sponsored by a financial intermediary - similar to factoring without recourse, but larger scale - example of off-balance sheet accounting |
| what is step 1 of securitization of receivables? | - seller divides receivables into bundles, grouped by credit risk - portfolio sold to a SPE created by a financial intermediary, then seller derecognizes - company often processes them, less a fee - sometimes company end involvement with receivables |
| what is step 2 of securitization of receivables? | SPE issues tradable interest-bearing securities backed by receivables |
| what are the 5 separate reporting categories for receivables? | - trade accounts, prepayments, tax refunds, etc. - current vs non-current amounts - impaired balances, allowance for credit risk - disclosure of interest income, impairment losses/reversals - losses on sale of receivables (IFRS) |
| what are the 4 disclosure for each separate reporting categories with respect to receivables? | - carrying amounts - terms regarding assets pledged/held as collateral - indication of amounts and where practicable maturity dates of accounts with maturity of more than one year - extensive disclosures of terms regarding securitization (IFRS) |
| what are the 3 risks arising from credit instruments? | 1. credit risk 2. liquidity risk 3. market risk |
| what is credit risk of financial instruments? | risk that a party will default on obligation |
| what is liquidity risk of financial instruments? | risk that an entity will have difficulties paying liabilities |
| what is market risk of financial instruments? | fluctuation of FV/cash flows from a receivable |
| what are the 3 key financial tools for receivables analysis? | 1. A/R aging analysis 2. trendline analysis 3. ratio analysis |
| what is A/R aging analysis? | - divides age of A/R into various groups based on amount of time uncollected (available report through most accounting software) |
| what are the 3 issues to be aware of with A/R aging analysis? | - individual credit terms for each customer - time since billing date (billing date can be after invoice date) - time grouping size (must be appropriate based on data and company credit terms) |
| what is trendline analysis for receivables? | if outstanding A/R at each month end for a year is graphed, it can be used to predict the amount of receivables that should be outstanding in the future |
| what are the 2 issues to be aware of with trendline analysis for A/R? | - change in credit policy (can lead to change in A/R or bad debt) - change in products/business line (may cause changes in A/R) |
| what is ratio analysis for receivables? | using common iiquidity ratios involving A/R like: - quick (acid-test) ratio - A/R turnover - days sales uncollected |
| what are internal controls? | policies and procedures implemented by management to protect assets |
| what are 4 examples of internal controls? | - employee drug testing - surveillance - scrutiny of company email systems - internal controls applied to company accounting system |
| what are 3 aspects of effective cash control? | - separation of duties - same day deposits of cash receipts - payments using non-cash means |
| what is a petty cash fund? | a small amount of cash kept on hand to pay for small infrequent expenses |
| what should the petty cash box contain at all times? | cash and supporting receipts that total to petty cash fund amount |
| what happens when cash has been reduced to a predetermined level? | receipts are submitted for entry into accounting system, and a cheque is issued to reimburse petty cash fund |
| what is added to the journal when the currency in the box doesn't match the petty cash balance? | cash over/short expense is added as a debit or a credit depending on if cash balance is over or short |
| what should be done to the petty cash fund when it is rarely used? | balance should be reduced |
| what is a bank reconcilliation? | a process where the company bank/books cash balance goes from unreconciled to reconciled balance |
| what are the first 5/9 steps for a bank reconcilliation? | 1. identify ending general ledger cash balance 2. identify ending bank cash balance 3. deduct outstanding cheques from bank UB 4. subtract other payments by bank from books UB 5. add outstanding deposits from last months end to bank UB |
| what are steps 6-9 for a bank reconcilliation? | 6. ensure all deposits match what is in the company books 7. errors on company records or bank statement must be reported on bank reconc. 8. total both sides of bank reconc. 9. prepare an adjusting entry for cash balances calculated in the reconc. |
Created by:
user-2025479