Chapter 7: Cash and Receivables

These flashcards cover fundamental concepts related to cash management and accounts receivables that are essential for understanding financial accounting.

Cash and Cash Equivalents

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

Cash Equivalents

Short-term, highly liquid investments that are readily convertible to cash with little risk of loss, typically with a maturity date not exceeding three months.

Internal Control

A process designed to encourage adherence to policies, promote operational efficiency, minimize errors and theft, and enhance the reliability of accounting data.

Sarbanes-Oxley Act (Section 404)

Requires companies to document internal controls and assess their adequacy, and for auditors to express an opinion on management’s assessment.

Accounts Receivable

Created when sellers recognize revenue from a credit sale, representing payment due from customers which is expected to be collected within 30 to 60 days.

Trade Discounts

A percentage reduction from the list price given to customers, often related to bulk purchases.

Sales Discounts

Reductions in the amount owed by customers if payment is made within a specified time frame, incentivizing early payment.

Direct Write-Off Method

An accounting method where an uncollectible account is written off when it is deemed uncollectible; not allowed by GAAP for financial reporting.

Allowance Method

A GAAP-required method that uses a contra-asset account to estimate and account for uncollectible accounts receivable.

Compensating Balances

Funds that a borrower must maintain in an account as a condition for a loan, effectively increasing the cost of borrowing.

Secured Borrowing

Using accounts receivable as collateral for a loan, where the responsibility for collection remains with the borrowing company.

Factoring Arrangement

An arrangement in which a company sells its accounts receivable to a financial institution at a discount, commonly seen in credit card transactions.

Aging of Accounts Receivable

A method to estimate uncollectible accounts by categorizing receivables based on how long they have been outstanding.

Discounting Notes Receivable

A process where a company can obtain immediate cash by selling a note to a financial institution, with the cash being the maturity value minus a discount.

Restricted cash:

not available for general use → classify separately.

Internal controls

segregation of duties, documentation, independent verification

Allowance method:

Adjusts for estimated uncollectibles (contra-asset)

Estimation

% of Sales (income statement focus) or Aging of Receivables (balance sheet focus).

Factoring

selling receivables for cash; “with recourse” means seller bears risk.

Receivable Turnover

Net Sales / Avg. A/R

Days to Collect

365/ Turnover