Chapter 7

  1. Classfication:

    Restricted cash
    Identify restricted cash and classify as current and noncurrent assets
  2. Classification:

    petty cash and change funds
  3. Classification:

    Short-term paper
    Cash equivalents IF maturity < 3 months

    Temp investments IF maturity 3-12 months
  4. Classification:

    Post-dated checks and IOU's
  5. Classification:

    Postage on hand
    Prepaid expenses or office supplies
  6. Classification:

    Travel advances

    collected from employees or deducted from their salary
  7. Classification:

    Bank overdrafts
    Current liability
  8. Classification:

    Compensating balances
    Reduce cash IF right of offset exists

    Otherwise classify as current or noncurrent asset and disclose arrangement in the notes
  9. Difference between current and noncurrent receivables
    Current receivables are expected to be collected w/i 1 year. Noncurrent are long-term receivables.
  10. Trade receivables
    Accounts (oral promise) and notes (written promise) receivable customers owe a company for goods bought or services rendered.
  11. Nontrade receivables
    • Can arise from a variety of transactions:
    • 1- advances to officers and employees
    • 2- advances to subsidiaries
    • 3- deposits paid to cover potential damage/loss
    • 4- deposits paid to guarantee performance or pmt
    • 5- dividends and interest receivable
    • 6- claims against insurance companies, defendants under suit, gov't bodies for tax refunds, common carriers for damages or lost goods, creditors, customers for returnable items
  12. Direct write-off method

    When a specific acct is definitely uncollectible, A/R is credited and Bad Debt expense is debited
  13. Allowance method

    An estimate is made of expected uncollectible accts and this is credited to Allowance and debited to Bad Debts Expense

    This method more closely matches expenses and revenues and properly represents carrying value of A/R.
  14. Percentage-of-sales approach
    Income Statement approach

    A percentage of sales is used to estimate Allowance acct. The resulting estimate is the amount of the journal entry
  15. Percentage-of-receivables
    Balance Sheet approach

    A percentage of receivables is used to estimate the ENDING BALANCE in the allowance account
  16. Writing off a bad debt using the allowance method
    • Debit Allowance for Doubtful Acct's
    • Credit A/R

    If the acct is subsequently collected, reverse the previous entry and then debit cash and credit A/R
  17. Sale with recourse
    The seller guarantees payment to the purchaser in the event the debtor fails to pay

    The seller has a continuing involvement with the receivables

    The financial components approach is used
  18. Sale without Recourse
    The purchaser assumes risk of collectibility and absorbs any credit losses. It is an outright sale of the receivables both in form and substance.
  19. Due from factor account
    reported as a receivable.

    Accounts for the proceeds retained by the factor to cover probable sales discounts, sales returns and sales allowances.
  20. Journal entry for company that sells receivables WITHOUT RECOURSE to a factor where xx amt is retained in case of probable adjustments
    • Cash -------
    • Due from Factor xx
    • Loss on Sale of Rec. -------
    • Acct's Receivable --------
  21. Journal entry for company that buys receivables WITHOUT RECOURSE from a company where xx amt is retained in case of probable adjustments
    A/R ----------

    • Due from factor xx
    • Financing revenue ----- (equal to loss on sale)
    • Cash -----
  22. Journal entry for company that sells receivables WITH RECOURSE to a factor where xx is that amt retained in case of prob adjustments and yy is the amt of the recourse obligation
    • Cash -------
    • Due from factor -----
    • Loss on sale ------
    • A/R -----
    • Recourse liability yyyy
  23. Journal entry for company that purchases receivables WITH RECOURSE from a company where xx is the amt retained in case of prob adjustments and yy is the amt of the recourse obligation
    A/R -------

    • Cash -------
    • Financing revenue (loss - yy)
    • Due to company xxx
  24. The 3 conditions necessary for a company to record a sale of receivables
    • 1- The transferred asset is isolated from the transferor
    • 2- The transferees have obtained the right to pledge or exchange transferred assets
    • 3- The transferor does not maintain effective control over the tranferred assets
  25. Presentation of receivables on the balance sheet
    • Cash and cash equivalents xxxx
    • Accounts and notes receivable xxxx
    • Less: Allowance for doubtful acct's xxxx

    • Advances to subsidiaries
    • Federal income taxes refundable
    • Dividends and interest receivable
    • Other receivables and claims

    • Noncurrent receivables
    • Notes receivable from officers and key employees
    • Claims receivable
Card Set
Chapter 7
Cash and Receivables