Finance: Cash and Receivables Overview

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What is the correct definition of cash equivalents?

Only cash and bank drafts

Short-term, highly liquid investments that are readily convertible into known amounts of cash (correct)

Long-term investments held in a savings account

Investments that can change significantly in value

Which type of receivable is owed by customers from revenue?

Trade receivables (correct)

Amortized receivables

Non-trade receivables

Long-term receivables

How should a company initially measure trade receivables with no significant financing component?

At fair value

At the transaction price (correct)

At a predetermined fixed rate

At the current market value

What does 'Allowance for Doubtful Accounts' (AFDA) refer to?

Estimation of bad debts expected not to be collected Signup and view all the answers

What must companies disclose separately on the balance sheet?

Restricted cash Signup and view all the answers

How is impairment in receivables generally measured?

At amortized cost considering impairment Signup and view all the answers

What is another name for 'bad debts expense'?

Loss on impairment Signup and view all the answers

How should a company report separate overdrafts according to best practices?

As liabilities unless at the same bank Signup and view all the answers

What is the correct accounting entry when a note is initiated as interest-bearing?

DR Notes receivable, CR Cash Signup and view all the answers

Which method is not specified by ASPE for calculating yield rate?

Amortization method Signup and view all the answers

Which of the following correctly describes a 'zero coupon note'?

A note that does not make periodic interest payments Signup and view all the answers

When calculating interest income under IFRS, which formula is used?

Carrying amount x effective interest rate Signup and view all the answers

What is the difference between interest payment and interest income?

Interest payment is the cash received; interest income is accounted for Signup and view all the answers

What is a 'discount' in the context of notes receivable?

Lending out less than the face value Signup and view all the answers

What should be recorded as a combined journal entry for interest when it is collected?

DR Cash, CR Notes receivable Signup and view all the answers

What leads to the classification of a note as interest-bearing versus non-interest bearing?

Presence of a prescribed interest rate Signup and view all the answers

What is the correct journal entry for writing off an uncollectible account?

DR Allowance for doubtful accounts, CR Receivables Signup and view all the answers

When using the aging schedule for estimating uncollectible accounts, what is the primary output?

Ending balance in Allowance for doubtful accounts Signup and view all the answers

What adjustment is made when the current Allowance for doubtful accounts balance is a debit of $200 and the ending balance needed is $37,650?

DR Bad debts expense $37,850; CR AFDA $37,850 Signup and view all the answers

What method is described as estimating bad debts expense as a percentage of sales?

Percentage of sales method Signup and view all the answers

Which accounting principle is violated by using the direct write-off method?

Matching principle Signup and view all the answers

If a company estimates that 2% of $400,000 monthly net credit sales are uncollectible, what is the associated bad debts expense entry?

DR Bad debts expense $8,000; CR AFDA $8,000 Signup and view all the answers

What does the effective interest method under IFRS focus on?

Determining actual interest earned on a financial asset Signup and view all the answers

If the Allowance for doubtful accounts is currently credited at $18,800 and needs to be adjusted to $37,650, what is the required adjustment entry?

DR Bad debts expense $18,850; CR Allowance for doubtful accounts $18,850 Signup and view all the answers

What happens to the receivables if secured borrowing is used but the borrower fails to repay?

The creditor has the right to collect the receivables. Signup and view all the answers

In factoring without recourse, what is the primary characteristic of the transaction?

The bank has no right to collect from the seller if receivables are uncollectible. Signup and view all the answers

What determines whether a transaction is recorded as a sale or secured borrowing?

Whether the risks and rewards have been transferred. Signup and view all the answers

What is the entry for Crest Textiles when factoring $500K of receivables with a 3% finance charge?

DR Cash 460K, DR Loss 15K, CR A/R 500K. Signup and view all the answers

What is an essential aspect of securitization?

Receivables are pooled and interests are sold to third parties. Signup and view all the answers

What impact does factoring with recourse have on Crest Textiles?

Crest Textiles may be liable for uncollectible receivables. Signup and view all the answers

How should collateralized receivables be accounted for under secured borrowing?

Like regular accounts without special treatment. Signup and view all the answers

What is recorded in the entries when the bank factors receivables with Crest Textiles?

CR Finance revenue based on total receivables. Signup and view all the answers

What happens to the carrying amount of a note when cash is collected?

It decreases the carrying amount. Signup and view all the answers

How is the ending note receivable calculated assuming no write-offs?

Opening note receivable + interest income - cash collected. Signup and view all the answers

What is the correct journal entry for the first year with an interest-bearing note?

DR Note receivable 9,520; CR Cash 9,520. Signup and view all the answers

What is the effective rate of the interest-bearing note with a face value of $10,000 and a cash amount of $9,520?

12% Signup and view all the answers

Which entry reflects the recognition of interest income in the second year of the note?

DR Note receivable 1,159; CR Interest income 1,159. Signup and view all the answers

How is the ending carrying amount determined at the end of year 3?

By adding cumulative interest income over three years to the initial amount. Signup and view all the answers

What is the total interest income recognized over three years for an interest-bearing note with a 10% payment schedule?

$1,142 + $1,159 + $1,179 Signup and view all the answers

In how many periods is the discount amortized for an interest-bearing note with a $480 discount and a three-year term?

3 periods. Signup and view all the answers

What is the original amount lent out in the zero-interest-bearing note scenario?

$7,721 Signup and view all the answers

How much cash is received at the end of the third year for a zero-interest-bearing note with a face value of $10,000?

$10,000 Signup and view all the answers

What does ASPE permit regarding the calculation method for notes payable?

Only the straight-line method. Signup and view all the answers

In the event of a note being derecognized, which of the following is NOT a reason for derecognition?

Increased interest rate. Signup and view all the answers

What reflects the carrying amount of a note after the second year if cash of $1,000 was also received?

$9,821 Signup and view all the answers

Study Notes

Cash

Cash includes coins, currency, foreign currency, deposits, bank drafts, and money orders.
Cash equivalents are money market funds, certificates of deposit, and short-term paper.
Cash and cash equivalents are also defined under IFRS and ASPE as cash, demand deposits, short-term, highly liquid investments readily convertible into known amounts with insignificant value risk.
Restricted cash is set aside for a specific purpose and should be disclosed separately on the balance sheet.
Restricted cash can also be a non-current asset.
Overdrafts are typically recorded as liabilities unless they are held at the same bank.

Receivables

Receivables are a general right to receive cash.
Trade receivables are amounts owed by customers from revenue.
Non-trade receivables include loans to employees, dividends receivable, and other written promises.
Generally, initially measure receivables at fair value.
Trade receivables without significant financing are measured at transaction price (remember IFRS 15?).
Transaction price is also acceptable under ASPE when immaterial.
Subsequently, receivables are measured at amortized cost.
Impairment must be considered.

Allowance for Doubtful Accounts (AFDA)

Proactively assess the value of receivables for expected uncollectible amounts.
Estimate bad debts before customer defaults.
Three types of journal entries exist for this:
- First, estimate bad debts periodically.
- Second, write-off uncollectible accounts.
- Third, collect written-off accounts.
Bad debts expense (BDE) and allowance for doubtful accounts (AFDA - contra-asset) are used in journal entries.
Several approaches can be used to estimate AFDA; the allowance method, sales approach, and combined approach.

Allowance Method

The allowance method looks at the balance of receivables and estimates uncollectible amounts.
The end balance of AFDA is the calculated amount in the allowance method.
Use the aging schedule to determine uncollectible amounts.

Percentage of Sales Method

Estimated bad debts expense is a percentage of sales.
A straightforward approach.
Requires a periodic update of the allowance to match changes in credit sales.

Direct Write-Off Method

This approach directly records bad debts as expenses when accounts are deemed uncollectible.
This violates the matching principle.
Avoid using this method.

Receivables and Interest

When interest is material, consider interest.
Use effective interest rate (yield rate or market rate).
At initiation, record notes receivable and cash.
Periodically, record notes receivable, interest income, and adjust the carrying amount.
Interest payment is not the same as interest income; consider amortization.
Face value is the principal amount received at maturity.
Discount is lending for less than face value.
Premium is lending for more than face value.
Zero-interest-bearing notes have an implicit interest.

Derecognition of Receivables

Ways receivables are derecognized: -Cash collected -Write-off -Sale -Pledged as collateral

Secured Borrowing

Pledge receivables as collateral to secure a loan.
If the borrower defaults, the creditor collects the receivables.
Receivables remain under the borrower's control.

Sale of Receivables

Factoring: Selling receivables to a bank or finance company for a fee, and the bank collects amounts due.
Recourse means the seller is responsible if the buyer cannot collect amounts due.
Securitization is pooling receivables and selling ownership interests.
Sales versus secured borrowing transactions are considered. IFRS and ASPE criteria are used.

ASPE and IFRS

ASPE permits straight-line method for accounting interest on receivables.
IFRS uses the effective method to calculate interest.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Description

This quiz explores essential concepts related to cash and receivables in finance. Test your understanding of cash components, cash equivalents, restricted cash, and the nature of receivables. Gain insights into their significance in financial statements.