F3- M1, M2 Far CPA

Cash Equivalent

Short-term, highly liquid investments that are readily convertible to cash and have an original maturity of 90 days or less from date of purchase when acquired by the entity

Deposit in Transit

Funds sent by the depositor to the bank that have not been recorded by the bank and deposits made after the banks cutoff date will not be included in the bank statement

• Balance per depositor’s records will be higher than those of the bank

• Add to Bank (LOC - Outstanding Checks)

Outstanding Checks

Checks written for payment by the depositor that have not been presented to the bank, which results in a higher balance per bank records than per depositor records

• Deduct from Bank

Non-Sufficient Funds (NSF)

When bank charges the depositor’s account for a dishonored check and the check may not be redeposited until the following month

• This overstates depositor’s book balance as of the balance sheet date

• Deduct from Books

Restricted Cash

Cash that is set aside for a specific purpose or use

• Nature, timing, and amount must be disclosed in the footnotes

• If restriction is associated with a Current Asset or Current Liability —→ Classify cash as a Current Asset but separate from Unrestricted Cash

• If restriction is associated with a Non-Current Asset ior Liability —→ Classify cash as Non-Current Asset or Liability but seperate from Investments or Other Asset accounts

Simple Reconciliation

Explains differences between the cash balance reported by the bank and the cash balance per the depositor’s records

Reconciliation of Cash Receipts and Disbursements

Serves as proof of the proper recording of cash transactions

• Known as “Four-Column Reconciliation” or “Proof of Cash”

• 4 columns: Previous month’s balance, total of receipts, total of payments, current month’s true cash balance

Accounts Receivable

Oral promises to pay debts and are classified as current assets

• Classified as trade receivables or NON-trade receivables

Trade Receivables

Accounts receivables from purchases of the company’s goods and services in the ordinary course of business

Non-trade Receivables

Accounts receivable from someone other than customers

Net Realizable Value (NRV)

Way of measuring Accounts Receivable which is the balance of A/R account (Amount to be collected) adjusted for allowances for current expected credit losses, sales discounts, and sales returns and allowances

Trade Discounts (quantity discounts)

Discount offered for bulk buying

• Quoted as a percentage

• Applied one at a time

• Recorded using the net method

Sales Allowances

Contra-revenue account where companies may adjust prices for shipped goods that do not meet expectations of customers

Regulation S-X

Sets forth the form and content of and requirements for interim and annual financial statements to be filed with the SEC

Regulation S-B

Sets forth the disclosure requirements for small business issuers

Regulation S-K

Sets forth non-financial reporting requirements for various SEC filings used by public companies

Regulation S-T

Sets forth rules governing electronic filings

Current Expected Credit Loss (CECL) Method

Method of recognizing uncollectible A/R that reflects the amount an entity expects to collect from customers and includes consideration of customer credit risk

• Percentage of each period’s ending accounts receivable is estimated to be uncollectible = “Allowance for Expected Credit Losses”

• Allows us to recognize A/R at it’s Net Realizable Value

• GAAP Approved —→ Consistent with accrual accounting

Credit Loss Expense ___

Allowance for expected credit losses ___

Direct Write-Off Method

Method of recognizing uncollectible A/R that waits for A/R to be uncollectible then writes it off and recognizes credit loss expense

• NOT GAAP —→ Does not match credit loss with revenue

  • Used by IRS for income tax purposes

• A/R are always overstated

Factoring Receivables

Process where a company can convert its receivables into cash by assigning them to a “factor” with or without recourse; considered a sale of receivables

• Buyer of the A/R is known as a factor

Without Recourse

Sale is final and that the factor (assignee) assumes the risk of any losses on collections

• Similar to a true sale

• No recourse against seller

Cash ___

Due from Factor ___

Loss on Sale of Receiv. ___

A/R ___

With Recourse

Factor has an option to re-sell any uncollectible receivables back to the seller

• Seller must buy back any uncollectible

• If A/R is transferred to a factor:

  • It can be treated as a sale or borrowing

Pledging (Assignment)

Process where the company uses existing accounts receivables as collateral for a loan

• Company retains title of the receivables and will use proceeds to pay the loan

• Requires footnote disclosure ONLY

Due From Factor

Reflects the proceeds retained by the factor; amount protects factor against sales return, sales discount, allowances, and customer disputes

• Similar to a security deposit held by the factor and is paid back to the seller when the factor collects all of the A/R

• Is forfeited if the receivables are not fully collected

Securitization

A/R is transferred to a different entity, such as a trust or subsidiary

Subledger

Used to record and store the more detailed information that is summarized in the control account of the general ledger for large volume of transactions

• Control Account: Gives the single-line totals in the general ledger

Trade Receivable Subledger

Used to manage the company’s customers and receipts from those customers

Inventory Subledger

Used to manage movement of inventory and prices

• Each item of inventory has a separate account in the subledger for tracking

Property, Plant, and Equipment Subledger

Contains detailed information for each asset apart of PP&E that have their own unique attributes worth tracking

Account Payable and Accrued Liabilities Subledger

Used to manage amounts owed to suppliers and subsequent payments by including an account for each vendor/ supplier, along with the date and amounts incurred and paid

Notes Receievable

Written promises to pay a debt where the writing is called a promissory note

• Can be classified as current or long-term asset, depending on with it is collected

• It is measured at Present Value = Face Value - Unearned Interest

• Must be adjusted for CECL

• Can be discounted (sold)

Maturity Value

Total amount that the loan will eventually generate

• Interest + Face Value

Discount is always applied to calculate the payment from the bank