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What is the definition of a cash equivalent and what are some examples of financial instruments included in this category?
A cash equivalent is an investment that has a maturity date no longer than three months from the date of purchase. Cash equivalents include such things ascertain money market funds, treasury bills, and commercial paper.
What does a system of internal control refer to?
- A system of internal control refers to a company's plan to
- (a) encourage adherence to company policies and procedures,
- (b) promote operational efficiency,
- (c) minimize errors and theft, and
- (d) enhance the reliability and accuracy of accounting data.
How do the gross and net methods view cash discounts not taken?
The gross method views cash discounts not taken as part of sales revenue. The net method considers cash discounts not taken as interest revenue.
If sales returns are material, how should they be accounted for?
If returns are material, they should be estimated and recorded in the same period as the related sale. This is accomplished by recording adjusting journal entries at the end of an accounting period.
What adjusting entry is required to record bad debts using the allowance method?
The allowance method attempts to estimate future bad debts and match them with the related sales revenue. An adjusting entry records a debit to bad debt expense and a credit to allowance for uncollectible accounts, a contra account (valuation account) to accounts receivable.
How are accounts receivable reported in the balance sheet?
Accounts receivable are reported in the balance sheet net of the allowance for uncollectible accounts.
How are transferred receivables accounted for if the transferor surrenders control?
If the transferor surrenders control over the receivables transferred, the arrangement is accounted for as a sale; otherwise, it's accounted for as a loan with receivables pledged as collateral.
What is the difference between an assignment and a pledging of accounts receivable?
An assignment involves the pledging of specific accounts receivable as collateral for a debt. A variation of assigning receivables is when accounts receivable in general, rather than specific receivables, are pledged as collateral. This variation is referred to as pledging accounts receivable.
Who assumes the risk of uncollectibility, the buyer or the seller, when accounts receivable are factored without recourse?
What three conditions must be in place for a transfer of receivables to be treated as a sale?
- a) The transferred assets have been isolated from the transferor - beyond the reach of the transferor and its creditors.
- b) Each transferee has the right to pledge or exchange the assets it received.
- c) The transferor does not maintain effective control over the transferred assets.
What information is provided by the receivables turnover ratio? The average collection period?
- The receivables turnover ratio indicates the number of times during a period that the average accounts receivable balance is collected.
- The average collection period is an approximation of the number of days the average accounts receivable balance is outstanding.