Chapter 7: Cash and Receivables

These flashcards cover key terms and concepts related to cash and receivables, highlighting definitions and important accounting practices.

Cash and Cash Equivalents

Amounts readily available to pay off debt or use in operations, including currency and coins, balances in checking accounts, and deposits.

Cash Equivalents

Investments that are easily convertible to cash with a maturity date of no more than three months.

Internal Control

Procedures designed to promote adherence to company policies, operational efficiency, and reliability of accounting data.

Sarbanes-Oxley Act

Legislation that requires companies to document internal controls and assess their adequacy.

Accounts Receivable

Amounts owed to a business from credit sales or services rendered to customers.

Trade Discounts

A percentage reduction from the list price offered to customers, often based on quantity.

Sales Discounts

A reduction in the amount owed if payment is made within a specified period.

Gross Method

Records accounts receivable at the full invoice price before any discounts.

Net Method

Records accounts receivable at the invoice price minus any sales discounts.

Allowance for Uncollectible Accounts

A contra-asset account used to estimate expected credit losses on receivables.

Direct Write-Off Method

An accounting method that recognizes bad debts when they are confirmed as uncollectible, not allowed by GAAP.

Estimating Bad Debts

A process of predicting amounts of receivables that are expected to be uncollectible based on historical data and recent trends.

Notes Receivable

Formal credit arrangements that represent a promise to pay a specified amount at a future date.

Financing with Receivables

Using accounts receivable as collateral for loans or selling them to obtain cash.

Application: Sales Discount (Gross Method)

A company sells goods for 8,000 with terms 1/10, n/30. If the customer pays within the discount period and the gross method is used, the cash received is 8,000 * (1 - 0.01) = \$7,920. A sales discount of 8,000 * 0.01 = \$80 is taken.

company has credit sales of 600,000. Historical data suggests that 1.5\% of credit sales will be uncollectible.

A company has credit sales of 600,000. Historical data suggests that 1.5\% of credit sales will be uncollectible. The Bad Debt Expense for the period is 600,000 * 0.015 = \$9,000. The journal entry would be: Debit Bad Debt Expense 9,000; Credit Allowance for Uncollectible Accounts 9,000.

Which of the following would NOT be classified as a cash equivalent? A) A 60-day Treasury bill. B) Commercial paper maturing in 2 months. C) A 4-month certificate of deposit (CD). D) A money market fund.

Answer: C) A 4-month certificate of deposit (CD), as cash equivalents have a maturity date of no more than three months.

Which internal control principle is violated if the same employee who handles cash receipts also performs the bank reconciliation?

Answer: Separation of Duties (or Segregation of Duties). These responsibilities should be divided among different employees to minimize the risk of fraud or error.