Far Ch 6: Cash, Receivables, and Valuation

Vocabulary practice flashcards covering Chapter 6 accounting topics, including cash equivalents, gross and net discount methods, bad debt estimation, sales of receivables with and without recourse, note valuations, bank reconciliations, and impairment.

Cash Equivalents

Short-term ($ST$), highly liquid investments such as treasury bills, commercial paper, and money market funds.

Items Not Reported as Cash

postdated checks, travel advances collected, $IOUs$ (receivables), postage stamps on hand, bank overdrafts (same bank netted, classified as current liabilities, $CL$), and uncollected travel advances (prepaid expenses).

Variable Consideration

An amount of consideration a company will receive that depends on future events, including trade discounts, cash/sales discounts, sales and return allowances, and the time value of money ($TVM$).

Net Method (Cash/Sales Discounts)

An accounting method where accounts receivable is recorded net of discount on the date of sale because the customer is expected to take the discount; if payment occurs after the discount period, the difference is credited to Sales Discounts Forfeited.

Gross Method (Cash/Sales Discounts)

An accounting method where accounts receivable is recorded at full amount on the date of sale because the customer is not expected to take the discount; if payment occurs within the discount period, a debit to Sales Discounts is recorded.

Sales Returns & Allowances

A contra-revenue account with a debit balance

past year SR & A journal entry

debit refund liability, credit AR

debit inventory, credit est inventory returns (%cogs *returns)

end of year SR&A adjustment

Debit SR&A (est returns- returns in yr, Credit refund liability

Debit est inventory returns, Credit COGS

Direct Write-Off Method

A non-GAAP cash basis method for bad debt where Bad Debt Expense ($BDE$) and Accounts Receivable ($A/R$) are recorded only when an account is officially determined to be not collectible.

Direct write off method write off entry

Debit Bad Debt Expense, credit Accounts Receivable

Allowance Method

A GAAP accrual basis method for bad debt where an estimate of uncollectible accounts is recorded at the end of each period .

Allowance method end of period entry

Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.

Allowance method write off

Debit allowance for DA, Credit AR

Net Accounts Receivable (Net AR)

$\text{Net } AR = AR - AFDA$.

Balance Sheet Method (% of AR)

Ending balance = AR balance * % recievables , solve for BDE

Income Statement Method (% of Credit Sales)

BDE= net credit sales * % sales estimated uncollectible.

Circumstances where stated interest rates on notes are not considered fair value:

when no interest rate is stated, when the stated rate is unreasonable, or when the face amount differs significantly from the current sales price.

AR t account

Debits: beg, AR, credit sales

Credits: write offs, $collections, sales returns this year

AFDA t account

Debits: write offs
Credits: beginning balance, BDE, collection of previous write offs

what rate is used for NR

market - “yield” effective”

BAL

carrying value

PRIN

disc/ prem ammortization

INT

interest revenue

Factors

Companies or banks that buy receivables from businesses for a fee.

Recourse

seller must pay the buyer if accounts receivable cannot be collected.

Due from Factor

An asset account - $\text{Due from factor} = \text{total receivables} \times \text{\% kept by buyer for probable adjustments}$.

Loss on Sale of Receivables (With Recourse)

finance fee- $\text{Loss} = (\text{total receivable} \times \text{\% commission}) + \text{recourse liability}$.

Journal entry for selling w/o recourse

debit cash (selling price) , due from factor, loss on sale recievable

credit A/R (amt of revievable)

Journal entry for selling w/ recourse

credit recourse liability

Journal entry for buying - w/ or w/o recourse

Debit AR

Credit due to customer, interest rev (finance fee), cash

Compensating Balances

A minimum deposit requirement where the bank keeps a certain amount of a loan, requiring usable loan amount calculation:

effective i = (full $ borrowd* int rate)/ (full $ borrowed- compensate balance)

Trade Discounts

Recorded at the amt of disc, debit AR, credit sales rev

FOB Shipping Point

buyer pays freight costs.

Fair value method entry

Debit NR
Credit unrealized hold G/L- income

Bank Balance Adjustments

add deposits in transit ($+$), deduct outstanding checks ($-$), and adjust for bank errors ($\pm$).

Book Balance Adjustments (Bank Reconciliation) and entries

deduct bank service charges and nonsufficient funds checks ($-NSF$), (debit exp, credit cash) add bank credits and interest ($+$) (debit AR, credit cash) , and adjust for company errors ($\pm$) (debit cash, credit interest rev)

Note Impairment

$\text{impairment} = CV - PV\text{ future } CF$, (debit to $BDE$ and a credit to $AFDA$.)