Chapter 7 - Cash and Receivables

Cash

Currency and coins, balances in checking accounts, and items acceptable for deposit in these accounts, such as checks and money orders received from customers

Cash Equivalents

Include money market funds, treasury bills, and commercial paper; investments that have a maturity date no longer than three months from the date of purchase

Internal Control

A company’s system to encourage adherence to company policies and procedures, promote operational efficiency, minimize errors and theft, and enhance the reliability and accuracy of accounting data

Separation of Duties

An internal control technique in which various functions are distributed amongst employees to provide cross-checking that encourages accuracy and discourages fraud

Compensating Balance

Specified balance (usually some percentage of the committed amount) a borrower of a loan is asked to maintain in a low-interest or noninterest-bearing account at the bank

Receivables

A company’s claims to the future collection of cash, other assets, or services

Accounts Receivable

Amounts to be received from the sale of goods or services on account

Trade Discounts

Percentage reduction from the list price

Sales Discounts

Cash discounts; reduce the amount to be received from a credit customer if the amount is paid within a specific period of time

Gross Method

The buyer views a discount not taken as part of the cost of inventory; the seller views a discount not taken by the customer as part of sales revenue

Sales Return

The return of merchandise for a refund or for credit to be applied to other purchases

Refund Liability

Amount the seller estimates will be refunded to customers who make returns

Credit Losses / Bad Debts / Impairments of Receivables / Uncollectible Accounts

Losses due to failure by customers to pay amounts owed for purchase of goods or services

Allowance Method

The pattern in which the allocation base is expected to be consumed

Allowance for Uncollectible Accounts / Allowance for Bad Debts / Allowance for Doubtful Accounts / Allowance for Credit Losses

Contra account that reduces accounts receivable to the net amount expected to be collected

Estimates

Predictions of future events

Balance Sheet Approach

Determining an income statement amount by estimating the appropriate carrying value of a balance sheet account and then adjusting the account as necessary to reach that carrying value

CECL (Current Expected Credit Loss) Model

A model used to estimate credit losses (bad debts) for receivables, as well as those debt investments that are accounted for as held to maturity

Income Statement Approach

Estimating an income statement amount directly, rather than basing it on the change in a balance sheet account

Notes Receivable

Receivables supported by a formal agreement or note that specifies payment terms

Interest-Bearing Note Receivable

Notes that state a principal and interest rate to be paid by a debtor to a creditor at a specified maturity date(s)

Noninterest-Bearing Note

Notes for which the interest is deducted from the face amount of the note to determine the cash proceeds made available to the borrower at the outset

Pledge

A promise to relinquish control of an asset (or assets) in payment (or partial payment) of an amount due

Factor

Financial institution that buys receivables for cash, handles the billing and collection of the receivables, and charges a fee for this service

Without Recourse

The buyer assumes the risk of bad debts

Securitization

The company creates a special purpose entity (SPE), usually a trust or a subsidiary; the SPR buys a pool of trade receivables, credit card receivables, or loans from the company and then sells related securities

With Recourse

The seller retains the risk of uncollectibility

Discounting

The transfer of a note receivable to a financial institution

Bank Reconciliation

Comparison of the bank balance with the balance in the company’s own records