Jackson stuff Chapter 8: Reporting and Analyzing Receivables

Vocabulary practice flashcards covering fundamental terms, accounting treatments, valuation methods, and financial analysis ratios for receivables.

Receivables

money owed to a business by its customers or other entities for goods or services delivered on credit

Accounts Receivable

Amounts customers owe on account that result directly from the sale of goods and services.

Notes Receivable

A formal credit instrument representing a written promise for amounts to be received at a specified future date or on demand.

Other Receivables

Nontrade claims that generally do not result from operations, including interest receivable, loans to company officers, advances to employees, and income taxes refundable.

Trade Receivables

Notes and accounts receivable that result specifically from sales transactions.

Bad Debt Expense

An operating expense account used to record credit losses resulting from extending credit and sales on account; also referred to as uncollectible accounts expense. Bad debt expense is the estimated portion of credit sales that a company expects will never be collected from customers

Direct Write-Off Method

A method of accounting for uncollectible accounts that records actual credit losses only when an account is deemed uncollectible; it fails to match expenses with revenues and is not acceptable under GAAP.

Allowance Method

A GAAP-required method of accounting for uncollectible accounts that estimates bad debts at the end of each period, ensuring proper matching on the income statement and reporting receivables at cash realizable value.

Cash (Net) Realizable Value

The net amount of accounts receivable a company expects to collect in cash, determined by subtracting Allowance for Doubtful Accounts from total Accounts Receivable.

Allowance for Doubtful Accounts

A contra-asset account deducted from Accounts Receivable that reflects the estimated amount of claims against customers that will prove uncollectible.

Percentage-of-Receivables Basis

An estimation technique where management establishes a percentage relationship between outstanding receivables and expected losses from uncollectible accounts.

Aging the Accounts Receivable

The analysis of customer balances grouped by the number of days past due, applying progressively higher estimated uncollectible percentages to older groups.

Expected Credit Loss Model

A FASB-mandated model requiring companies to estimate and record expected uncollectible accounts and bad debt expense across all receivables regardless of risk level.

Factor

A finance company or bank that purchases receivables from businesses for a service charge (typically $1\%$ to $3\%$) and directly collects customer payments.

Promissory Note

A negotiable written promise to pay a specified amount of money on demand or at a definite future time.

Maker

The party in a promissory note transaction that promises to pay the money and records the obligation as a note payable.

Payee

The party in a promissory note transaction to whom payment is to be made and who records the instrument as a note receivable.

Dishonored (Defaulted) Note

A promissory note that is not paid in full at maturity and ceases to be negotiable.

Concentration of Credit Risk

The threat of nonpayment arising from a single major customer or class of customers that could substantially affect a company's financial condition.

Accounts Receivable Turnover

A liquidity ratio measuring how many times per period a company collects its average accounts receivable, computed as $\frac{\text{Net Credit Sales}}{\text{Average Net Accounts Receivable}}$.

Average Collection Period

A metric evaluating credit and collection policies by calculating the average number of days required to collect receivables, computed as $\frac{365\,\text{days}}{\text{Accounts Receivable Turnover}}$.

Captive Finance Companies

Wholly owned finance subsidiaries that promote the sales of a parent company's products by offering financing options directly to customers.