MGMT 200 Chapter 1
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This 2 page Test Prep (MCAT, SAT...) was uploaded by Zhijing Liu on Saturday February 7, 2015. The Test Prep (MCAT, SAT...) belongs to MGMT 200 at Purdue University taught by Rebecca Trax in Fall. Since its upload, it has received 135 views.
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Date Created: 02/07/15
The major important things for this chapter 1 Accounts receivable represent the amount of cash owed to a company by its customers from the sale of products or services on account 2 Credit sales transfer products and services to a customer today while bearing the risk of collecting payment from that customer in the future Credit sales transactions are also known as sales on account or service on account 3 Credit sales typically include an informal credit agreement supported by an invoice They require payment within 30 to 60 days after the sale as indicated in the invoice Even though the seller does not receive cash at the time of the credit sale the rm records revenue immediately as long as future collection from the customer is reasonably certain 4 The legal right to receive cash is valuable and represents an asset of the company Account receivable or trade receivables 5 Nontrade receivables are receivables that originate from sources other than customers They include tax refund claims interest receivable and loans by the company to other entities including stockholders and employees When receivables are accompanied by formal credit arrangements made with written debt instruments or notes we refer to them as notes receivable 6 Net revenues a company s total revenue less any amounts for discounts returns and allowances 7 Sales allowance is the customer does not return the product or service but the seller reduces the customer s balance owed to provide at least a partial refund 8 The sales allowance is recorded as contra revenue sales discounts returns and allowances are contra revenue account debt 9 The discount terms 210 receive 2 discount if the amount owed is paid within 10 days n30 if the customer does not take the discount full payment net of any returns or allowances is due within 30 days 10Account receivablebalance sheet 11Under the allowance method companies are required to estimate future uncollectible accounts and record those estimates in the current year Estimated uncollectible accounts reduce assets and increase expenses 12Estimating uncollectible accounts based on the percentage of accounts receivable expected not to be collected is known as the percentageof receivables method baance sheet method Because we base the estimate of bad debts on a balance sheet amount amount receivable 13The allowance method estimates uncollectible accounts 14Bad Debt expense represents the cost of the estimated future bad debts 15Adjusting for estimates of future uncollectible accounts matches expenses bad debts in the same period as the revenuescredit sales they help to generate 16We adjust for future bad debt by making an allowance for uncollectible accountsThe contra asset account credit 17The older the account the less likely it is to be collected 18The writeoff the account receivable has no effect on total amounts reported in the balance sheet or in the income statement Because we have already recorded the negative effects of the bad news So collecting cash on an account previously written off has no effect on total assets and no effect on net income 19The accounting principle that would require recognition of bad debt expense to sales in the current period is the matching principle 20The amount that is actually expected to be collected on accounts receivable is referred to as net realizable value account receivable minus allowance for uncollectible accountSgross accounts receivable less allowance for doubtful accounts is the net realizable value of account receivable 21Bad debt expense is reported on the income statement and classi ed as an operating expense