Chapter 7 Cash and Receivables

These flashcards include essential vocabulary and definitions for Chapter 7 on Cash and Receivables, preparing students for exam review.

Cash

Amounts readily available to pay off debt or to use in operations, such as currency and coins, balances in checking accounts, deposits like checks and money orders.

Cash Equivalents

Have a maturity date no longer than three months from the date of purchase, examples include money market funds, treasury bills, and commercial paper.

Internal Control

Processes put in place by a company to encourage adherence to policies, promote efficiency, minimize errors and theft, and enhance reliability and accuracy of accounting data.

Sarbanes-Oxley Act (Section 404)

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

Restricted Cash

Cash that is restricted in some way and not available for current use, often set aside for specific future purposes.

Compensating Balances

An amount that compensates the bank for granting a loan, requiring the borrower to maintain a specified balance in a noninterest-bearing account.

Accounts Receivable

Claims to future cash collections, resulting from the sale of goods or services on credit.

Direct Write-Off Method

A method for accounting for uncollectible accounts where specific accounts are written off when deemed uncollectible, not aligned with GAAP.

Allowance Method

A GAAP-recommended method to account for bad debts using a contra-asset account to reduce accounts receivable to the estimated collectible amount.

Trade Discounts

A percentage reduction from the list price, often used for incentivizing bulk purchases.

Sales Discounts

Reductions in the amount to be paid by a credit customer if paid within a specified period, such as 2/10, n/30.

Gross Method

Records accounts receivable based on the full sales price without considering potential discounts.

Net Method

Records accounts receivable based on the expected collectible amount after discount if paid within the discount period.

Sales Returns

Merchandise returned for a refund or credit, requires the recording of estimated returns at the time of sale.

Bad Debt Expense

An expense recognized for accounts that are expected to be uncollectible, impacting net income.

Receivables Turnover Ratio

A ratio that measures how efficiently a company uses its assets, calculated as net sales divided by average accounts receivable.

Current Receivables

Receivables that are expected to be collected within a year, generally reflecting accounts and notes receivable.

Noninterest-Bearing Notes

Notes that do not explicitly state interest but have interest discounted from the face amount upon issuance.

Factoring Receivables

Selling accounts receivable to another company (factor) to manage cash flow, can occur with or without recourse.

Which of the following items is most appropriately classified as 'Cash' for financial reporting purposes, according to GAAP?

1. A 60-day certificate of deposit 2. Funds in a bank account designated as a compensating balance for a loan 3. Currency and coins on hand in the company's vault 4. A received check from a customer post-dated to the next fiscal period Correct Answer: 3. Currency and coins on hand in the company's vault