26 Questions
Which of the following statements about receivables is true?
Receivables include all money claims against other people, companies, and organizations.
Which of the following is an example of a receivable?
Dividends receivable
How are trade receivables classified in the balance sheet?
As current assets
Which of the following statements about VAT is true?
VAT is only charged on final customers
When is VAT payable?
When you sell
How often is VAT reversed to the Government?
Monthly
Which financial statement(s) prompted the need for the expected credit loss (ECL) model?
Balance sheet
What is the purpose of the expected credit loss (ECL) model?
To anticipate and recognize credit losses before they happen
What does the probability of default (PD) express?
The likelihood of a client incurring a credit loss
What is factoring in the context of account receivables?
The transfer of account receivables to another company
Which of the following is true about initial recognition of a receivable?
It is related to the selling of goods and execution of a service
How are trade discounts accounted for in the income statement?
As a reduction of revenue (debit)
What are notes receivable?
Formal, written instruments of credit issued to customers
How are interests on notes receivable recorded?
Interests are accrued in interim periods and recorded in the profit and loss statement
Which of the following is true about notes receivable?
They can be classified as current or non-current depending on the maturity period
What is the maturity value of a note that was issued on 10/03/2020 with a due date 90 days from issuing date and an interest rate of 8%?
$5,099
When should a company calculate accrued interest for a note receivable if it needs to report its interim financial statement as of 31/03?
On 31/03 when the financial statement is being reported
What is a credit note used for in accounting?
To correct errors in an invoice
According to IFRS 9, what are the three areas of accounting for financial instruments?
Classification and measurement, Impairment, Hedge accounting
What is the purpose of the allowance for bad debts?
To record the estimated amount of uncollectible accounts
How is the bad debt provision estimated based on the aging schedule?
By applying different rates to an aging schedule of account receivables
When is the write-off of account receivables authorized?
When the accounts receivable are not recoverable anymore
Factoring accounts receivables means
selling them and transferring all rights and obligations to the Factor.
What does it mean when factoring is done on a without recourse basis?
The factor company retains all the risk associated with the trade receivable.
What is the purpose of VAT (value added tax)?
To impose a tax on goods based on their value addition.
Who assesses a finance charge and retains a portion of the accounts receivable in a factoring arrangement?
The bank
Study Notes
Receivables
- A receivable is an example of an asset that a company expects to receive in the future.
- Trade receivables are classified in the balance sheet as current assets.
Value Added Tax (VAT)
- VAT is payable when the taxable supply is made.
- VAT is reversed to the government on a periodic basis, usually quarterly or monthly.
Expected Credit Loss (ECL) Model
- The ECL model was prompted by the need for a more accurate financial statement representation.
- The purpose of the ECL model is to estimate the expected credit loss on a financial instrument.
- The probability of default (PD) expresses the likelihood of a borrower defaulting on a loan.
Factoring
- Factoring is the process of selling receivables to a third party, known as a factor.
- Factoring can be done on a with recourse or without recourse basis.
- When factoring is done on a without recourse basis, the factor bears the risk of bad debt.
Notes Receivable
- Notes receivable are written promises to pay a certain amount of money at a future date.
- Interest on notes receivable is recorded as interest income.
- Notes receivable are initially recognized at their fair value.
- Trade discounts are accounted for in the income statement as a reduction of revenue.
- The maturity value of a note is the face value plus accrued interest.
- Accrued interest for a note receivable should be calculated at each interim reporting date.
Credit Notes
- A credit note is used to reduce the amount owed by a customer.
IFRS 9
- IFRS 9 classifies financial instruments into three categories: amortized cost, fair value through profit or loss, and fair value through other comprehensive income.
Allowance for Bad Debts
- The purpose of the allowance for bad debts is to estimate the amount of receivables that will not be collected.
- The bad debt provision is estimated based on the aging schedule of receivables.
- The write-off of account receivables is authorized when it is confirmed that the debt will not be collected.
Further Notes
- Factoring accounts receivables means selling the receivables to a third party.
- The factor assesses a finance charge and retains a portion of the accounts receivable in a factoring arrangement.
- The purpose of VAT is to tax the value added to goods and services at each stage of production and distribution.
Test your knowledge on factoring accounts receivables with this quiz! Learn about the process of collecting payments, handling uncollectible amounts, and remitting funds to the bank.
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