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CSU - ACT 331 - Study Guide - Midterm

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CSU - ACT 331 - Study Guide - Midterm

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background image Chapter 7 (7 quantitative, 1 qualitative, extra credit) Cash 1. Cash equivalents a. Readily convertible to known cash
b. Short term (3 months or less), highly liquid investments
c. Present risk because of changes in interest rates
d. Treasury bills, commercial paper, money market funds
2. Restricted cash a. Cash not available for use
b. Fund balances are not material
c. Petty cash, payroll dividend funds
d. Current asset or long term asset
e. Compensating balances: require customers to maintain 
minimum balance in check or savings account i. Separately legally restricted deposits ii. Noncurrent assets- investments or other asset section 3. Bank overdrafts a. Shown as a liability
b. Unless there is another account in the same bank which can be 
used to offset the overdraft Receivables (recognition, valuation, disposition) 1. Current a. Collect within a year or during the current operation cycle  whichever is longer 2. Noncurrent a. Long-term 3. Trade receivables  a. Customer owes a company amounts for goods bought or services rendered b. Classify as: i. Accounts receivable 1. Oral promises of the purchaser to pay for  goods/services sold 2. Represent “open accounts” resulting from short-term  extensions of credit 3. Collects within 30-60 days ii. Notes receivable 1. Written promised to pay a certain sum of money  on a specified future date 2. Short term or long term 4. Nontrade receivables a. Arise from a variety of transactions other than business  operations b. Report them as separate items in the balance sheet 
background image i. Advances to officers and employees, Advances to 
subsidiaries, Deposits paid to cover potential damages or 
losses, Deposits paid as a guarantee of performance or 
payment, Dividends and interest receivable
ii. Claims against: 1. Insurance companies for causalities, defendants  under suit, governmental bodies for tax refunds, 
common carriers for damages or lost goods, creditors
for returned or damages or lost goods, customers for 
returnable items (crates, containers etc.)
5. Recognition of Accounts Receivable Recognize when it satisfies its performance obligation by 
transferring the goods or services to the customers
Ex: Jennifer purchases $100 yoga pants on account
Account Receivable 100
Sales Revenue 100 Transaction price: the amount of consideration that a company
expects to receive from a customer in exchange for transferring 
goods or services
Variable Consideration Trade discounts To avoid frequent changes in catalogs
to alter prices for different quantities purchased
to hide the true invoice price from competitors
o Ex: Your cell phone has a list price of $90, sells to Best Buy
for 40% trade discount ($54)
Account Receivable 54
Sales Revenue 54 Cash (Sales) discounts To induce prompt payment
2/10, n/30
2% if paid within 10 days, gross amount due in 30 
days
2/10, E.O.M., net 30, E.O.M.  2% if paid anytime by the 10 th  day of the following  month, with full payment due by the 13 th  of the  following month  Why customers do it? Earns 18.25% or at least avoid rate  of interest cost o Gross Method Recognizes sales discount when it receives payment 
within the discount period
Sales discount is a deduction from sales to arrive at 
net sales
background image Ex: Sales of $10,000, terms 2/10, n/30
Account Receivable 10,000
Sales Revenue 10,000 Ex: Payment on $4,000 of sales received within 
discount period
Cash 3,920
Sales Discount 80
Account Receivable 4,000 Ex: Payment on $6,000 of sales received after 
discount period
Cash 6,000
Accounts Receivable 6,000 o Net Method Record A/R and related revenue at the amount of 
consideration expected to be received from a 
customer
Attempts to value the receivable at its net realizable 
value
Requires additional analysis and book keeping to 
record sales discount forfeited on A/R that have 
passed the discount period
Ex: Sales of $10,000, terms 2/10, n/30
Account Receivable 9,800
Sales Revenue 9,800 Ex: Payment on $4,000 of sales received within 
discount period
Cash 3,920
Account Receivable 3,920 Ex: Payment on $6,000 of sales received after 
discount period
Cash 6,000
Account Receivable 5,880
Sales Discount Forfeited 120 
-- on income 
statement as  “other revenue and  gains” ** If collection periods are short Gross/Net Method results in the same amounts for revenues and receivables equal to transaction price** Sales Returns and Allowances  Ex: Max grants an allowance of $300 to Oliver because  item is defective
Sales Returns and Allowance 300
Accounts Receivable 300
background image Ex: Max estimates an additional $100 in sales returns and 
allowances; an adjusting entry to record additional 
allowance
Sales Returns and Allowance 100
Allowance for Sales and Returns and  Allowances 100 o        Income Statement Sales Revenue 5,000
Less: Sales R&A 400
Net Sales Revenue
4,600 o Balance Sheet Cash  2,000 A/R 5,000
Less: Allowance 400
Net A/R
4,600 Time Value of Money o Company should measure receivables in terms of their  present value, the discounted value of the cash to be 
received in the future
o Revenue after the period of sale is interest revenue
o Companies ignore interest revenue related to A/R because 
the amount of the discount is not usually material in 
relation to the net income for the period
Ex: Best Buy makes a sale on account for $1,000 with  payment due in 4 months. The applicable annual rate of 
interest is 12%, payment is made at the end of 4 months
($1,000 x .96154) = $961.54; i= 4% n= 1 = .96154 6. Valuation of Accounts Receivable o NRV: A/Rs are valued at the amount of cash that is expected to be  collected o We recognize the bad debt expense in the period (year) of the sale a. Direct Write-of Method for Uncollectible Accounts (not  allowed under GAAP) i. Recognizes bad debt as they occur, not using allowance 
account, A/R are not valued at their NRV
ii. Can be used when the amount of bad debts are expected 
to be immaterial and is required to be used for tax 
purposes
iii. Ex: On December 10 Cruz Co. writes off as uncollectible 
Jane’s $8,000 balance
Bad Debt Expense 8,000 Account Receivable (Jane) 8,000 b. Allowance Method for Uncollectible Accounts i. Involves estimating uncollectible accounts at the end of 
each period
background image ii. Ensures companies state receivables on the balance 
sheet at their net realizable value (net amount the 
company expects to receive in cash)
iii. Balance sheet reflects the current estimate of expected 
uncollectible account losses at the reporting date
iv. Income statement reflects the effects of credit 
deterioration (improvement) that has taken place during 
the period
v. Many companies feel they are losing sales due to overly 
restrictive credit policies 
vi. When bad debts are material amounts FASB requires the
allow method:
1. Companies estimate uncollectible A/R and compare  the new estimate to the current balance in the 
allowance account
2. Companies debit estimated increases in uncollectible to Bad Debt Expense and credit them to ADAs 
(contra asset acct) through an adjusting entry at the 
end of each period
3. When companies write off a specific account, they  debit actual uncollectibles to ADAs and credit that 
amount to A/R
vii. Percentage of Sales (Income Statement Emphasis)  1. Calculates the bad debt expense based on the  (credit) sales for the period 2. Does a good job of the expense (matching)  recognition principle 3. Ex: Sally estimates that 2% of the $1,000,000 sales  will be uncollectible (20,000)
Bad Debt Expense 20,000
ADA or Allowance 20,000 viii. Percentage of Receivables – Aging Method 
(Balance Sheet Emphasis)
1. Calculates the bad debt expense based on an aging  schedule of the A/R  2. Does a good job of valuation of the A/R at their NPV 
3. Ex: Wilson reports bad debt expense of $26,610 for 
this year, assuming the ADA (allowance) account 
before adjustment had a credit balance of $800 
(26,610-800)
Bad Debt Expense 25,810
ADA or Allowance 25,810 Ex: Assume the ADA (allowance) account before 
adjustment had a debit balance of $200 (26,610+ 
200)
background image Bad Debt Expense 26,810 ADA or Allowance 26,810 ix. Recording Estimated Uncollectibles Ex: The manager
estimates that $10,000 of these sales will be uncollectible
(assuming 0 balance in the allowance account)
Bad Debt Expense 10,000 Allowance for Doubtful Account (ADA) 10,000 x. Recording the Write-Off of an Uncollectible Account
Ex: 
The VP of Brown Furniture authorizes a write-off of 
the $1,000 balance owed by Randall Co. on March 1, 
2018
ADA or Allowance 1,000
A/R (Randall Co.) 1,000 xi. Recovery of an Uncollectible Account  1. Reverse the entry made in writing off the account,  this reinstates the customer’s account 2. Journalizes the collection in the usual manner Ex: July 1, 2018, Randall Co. pays the $1,000 amount that 
Brown had written off on March 1, 2018
(1)
A/R (Randall Co.) 1,000
ADA or Allowance 1,000
(2) Cash 1,000
A/R (Randall Co.) 1,000
**only affects balance sheet accounts** Note Receivable (recognition, valuation, disposition) A formal promissory note Fairly liquid, easily convert to cash (may pay a fee) Customers who need to extend the payment period of an outstanding 
receivable, high-risk or new customers, loans to employees and 
subsidiaries, sale of property, plant and equipment, support all credit 
sales in pleasure and sport boat industry 
Stated interest rate: (the face rate or coupon rate) the rate contracted 
as part of the note
Effective-interest rate: (market rate or effective yield) the rate used in 
the market to determine the value of the note, the discount rate used to 
determine present value
a. Interest-bearing note i. Have a stated rate of interest b. Zero-interest-bearing notes (non-interest-bearing) i. Include interest as part of their face amount ii. The note is discounted to determine its present value and
the amount of cash given (received)
1. Recognition of N/R

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School: Cleveland State University
Department: OTHER
Course: Intermediate Accounting I
Professor: Peter Poznanski
Term: Spring 2017
Tags:
Name: Intermediate Accounting 16th edition
Description: Chapter 7,8,9
Uploaded: 03/23/2017
35 Pages 72 Views 57 Unlocks
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