ACCT 3723 1st Edition Exam 3 Study Guide Chapters 7 and 8 Chapter 7 Cash and Receivables I II III Identify Items That Are Considered Cash a Cash the standard medium of exchange and the basis for measuring and accounting for all other items i Most liquid of assets ii Cash consists of coin currency and available funds on deposit at the bank 1 Money orders certified checks cashier s checks personal checks and bank drafts b Certain classification problems are i Postdated checks and IOUS are receivables 1 If travel advances are collected from employees or deducted from their salaries they are classified as receivables ii Postage stamps are office supplies or prepaid expense iii Petty cash funds and change funds are CASH Indicate How To Report Cash and Related Items a Issues for reporting cash are i Cash Equivalents ii Restricted Cash iii Bank Overdrafts b Cash Equivalents short term highly liquid investments that are BOTH readily convertible to known amounts of cash AND so near their maturity that they present insignificant risk of charges in value because of changes in interest rates i Usually only investments with original maturities of three months or less qualify under the above definition ii EX treasury bills commercial paper and money market funds c Restricted Cash money earmarked for a specific purpose and therefore not available for immediate and general use by an organization i Companies classify restricted cash either in the current assets or in the long term assets section depending on the date of availability or disbursement ii Most of this is set aside for plant expansion or retirement of longterm debt d Bank Overdrafts when a company writes a check for more than the amount in its cash account i Companies should report this in the current liabilities section adding them to accounts payable Define Receivables and Identify the Different Types of Receivables IV a Receivables claims held against customers and others for money goods or services i Companies classify receivables and either current short term or noncurrent long term ii They are future classified in the balance sheet as either 1 Trade Receivables amounts billed by a business to its customers when it delivers goods or services to them in the ordinary course of business a These are usually sub classified into accounts receivable oral promises of payment or notes receivable written promise 2 Nontrade Receivables amounts due for payment to an entity other than its normal customer invoices for merchandise shipped or services performed a Examples i Advances to officers and employees ii Advances to subsidiaries iii Deposits paid to cover potential damages or losses iv Deposits paid as a guarantee of performance v Claims against 1 Insurance companies for casualties sustained 2 Defendants under suit 3 Governmental bodies for tax refunds 4 Creditors for returned damaged or lost goods 5 Customers for returnable items crates containers etc 3 The basic issues in accounting for accounts and notes receivable are the same recognition valuation and disposition discussed in IV Explain Accounting Issues Related to Recognition of Accounts Receivable a In most receivables transactions the amount to be recognized is the exchange price between the two parties i The exchange price is the amount due from the debtor a customer or a borrower ii Two factors may complicate the measurement of the exchange price 1 The availability of discounts trade and cash 2 The length of time between the sale and the due date of payments the interest element b Trade Discounts a discount on the retail price of something allowed or agreed between traders or to a retailer by a wholesaler V i Companies use these to avoid frequent changes in catalogs to alter prices for different quantities purchased or to hide the true invoice price from competitors ii Commonly quoted in percentages c Cash Discounts Sales Discounts deduction allowed by the seller of goods or by the provider of services in order to motivate the customer to pay within a specified time i Generally presented in terms such as 1 2 10 n 30 2 percent if paid within 10 days gross amount due in 30 days 2 2 10 EOM net 30 2 percent if paid any time before the 10 th day of the following month with full payment due by the 30 th of the following month d Non recognition and interest element i A company should measure receivables in terms of their present value that is the discounted value of the cash to be received in the future 1 When expected cash receipts require a waiting period the receivable face amount is not worth the amount that the company ultimately receives Explain Accounting Issues Related To Valuation of Accounts Receivable a Reporting of receivables involves i Classification 1 Involves determining the length of time each receivable will be outstanding ii Valuation b Net Realizable Value the net amount they expect to receive in cash i Companies value and report short term receivables as this ii Determining net realizable value requires estimating both uncollectible receivables and any returns or allowances to be granted c Uncollectible accounts receivables i Two methods are used in accounting for uncollectible accounts 1 Direct Write Off Method charging bad debts to expense in the period when individual invoices have been clearly identified as bad debts a Under this method Bad Debt Expense will show only actual losses from uncollectibles b Using the direct write off method is not considered appropriate except when the amount uncollectible is immaterial 2 Allowance Method involves estimating uncollectible accounts at the end of each period VI a The ensures that companies state receivables on the balance sheet at their net realizable value i Net Realizable Value the net amount the company expects to receive in cash b This method is appropriate in situations where it is probable that an asset has been impaired and that the amount of the loss can be reasonably estimated c The FASB requires the allowance method for financial reporting purposes when bad debts are material in amount i This method has three essential features 1 Companies estimate uncollectible accounts receivable They match this estimated expense AGAINST REVENUES in the same accounting period in which they record the revenues 2 Companies debit estimated uncollectibles to Bad Debt Expense and credit them to Allowance for Doubtful Accounts through an adjusting entry at the end of each period 3 When companies write off a specific account