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Accounting Chapter 6: Cash and Receivables

the most liquid of all assets, the resource used to engage in day to day business transactions and take advantage of business opportunities when they arise. Includes coins and currency
unrestricted funds on deposit with a bank (including foreign currency deposits)
negotiable instruments (such as checks)
bank drafts
undeposited credit card sales receipts
sinking funds
accounts into which a company deposits cash over an extended period (e.g., to retire long-term bonds). Sinking funds are normally reported as long-term investments.
certificates of deposits (CD’s)
financial statements issued by banks that allow a company to invest idle cash for contractual periods
bank overdrafts
overdrawn checking accounts
cash equivalents
short-term, highly liquid investments that are readily convertible into known amounts of cash and so near their maturity (90 days or less) that there is little risk of changes in value because of changes in interest rates.
internal control systems
the policies and procedures a company uses to ensure its financial reports are reliable, its operations (including safeguarding its assets) are effective and efficient, and it complies with applicable laws and regulations
control over receipts
Should be designed to safeguard all cash inflows from the time they arrive at the company until they are deposited in its bank account.
control over payments
Should ensure that only authorized payments are made for actual company expenditures
amounts owed to the company by customers and other parties arising from the company’s operations
trade receivables
arise from the sale of the company’s products or services to customers
nontrade receivables
arise from transactions that are not directly related to the sale of the company’s goods and services
trade discounts
means to provide incentives to important customers, grant price reductions for large purchases, or to hide real prices from competitors.
cash discount
induces prompt payment, stimulates faster collection of cash
gross price method
record the total invoice price in both the Accounts Receivable and Sales accounts at the time of sale as if no cash discount were involved. When the customer pays and takes the allowable cash discount, the company records the difference between the cash received and the original amount of Accounts Receivable as a debit to Sales Discounts Taken.
net price method
, records the net invoice price (after deducting the allowable cash discount) in both the Accounts Receivable and Sales accounts at the time of sale.
When the customer pays and takes the allowable cash discount, no adjustment is needed because the amount of cash received is equal to the recorded amount of the receivable. However, if the customer does not take the cash discount, it pays an amount that is greater than the amount in the company’s Accounts Receivable account. The company credits this excess to an account entitled Sales Discounts Not Taken
This account is an interest income account that is reported in the Other Items section of the income statement
Theoretically, the use of the net price method is superior because it values the accounts receivable at the net realizable value and also separates the amount of sales revenue from interest revenue.
sales return
When the customer returns goods to the seller
sales allowance
In addition, when goods are sold that turn out to be defective, the customer may retain the goods and be allowed a reduction in the purchase price
Allowance method and direct write-off method
Two methods to record uncollectible accounts
allowance method
companies record uncollectible accounts in the year of sale, based upon an estimate of the amount of uncollectible accounts
direct write-off method
companies record uncollectible accounts when they determine that a specific customer account is uncollectible. At that time, it writes off the account by debiting Bad Debt Expense and crediting Accounts Receivable.
receivables turnover
net credit sales/ avg. net receivables
avg. collection period
365/ receivables turnover ratio
secured borrowing
a company may assign or pledge its accounts receivable as collateral for a loan. If the company is unable to make payments on the loan, the creditor can require the amounts collected from the accounts receivable be used to repay the amount owed.
when a company sells its individual accounts receivable to a financial institution (called a factor). At the time of sale, the factor charges the selling company a commission based who bears the risk of noncollection.
accounts receivable are transferred to another entity, usually a trust or subsidiary and then sold as financial securities (usually debt instruments) collateralized by the accounts receivable. Investors receive cash as the accounts receivable are paid.
sale without recourse
the buyer (or factor) assumes all the risks of ownership. If any receivables are not collected, the factor cannot demand payment from the seller. Because the risks of ownership have been transferred from the seller to the factor and the factor has control of the asset (the accounts receivable), the transaction is accounted for as a sale of accounts receivable.
sold with recourse
the seller retains the risks of ownership and uncollectible accounts.
financial components approach
assigning fair values to components such as the recourse obligation (the estimated amount the seller will have to pay the factor) and any servicing rights. This results in both the factor and the seller recognizing the financial and servicing assets it controls.
discount formula
Maturity value * Rate * TIme
Go over bank reconciliation

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