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Questions and Answers
Where should companies classify restricted deposits held as compensating balances against short-term borrowing arrangements?
What should companies do if compensating balance arrangements exist without agreements that restrict the use of cash amounts shown on the statement of financial position?
How are bank overdrafts typically reported in a company's financial statements?
When are bank overdrafts considered a component of cash on a company's financial statements?
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How should companies treat bank overdrafts if they are material to the financial statements?
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What is the recommended classification for restricted deposits held as compensating balances against long-term borrowing arrangements?
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How do companies classify receivables for financial statement purposes?
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What do notes receivable represent?
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How long does a company typically collect accounts receivable within?
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How are trade receivables further classified in the statement of financial position?
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What are non-trade receivables in the context of the text?
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What characterizes notes receivable compared to accounts receivable?
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What is the purpose of bank reconciliation?
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What method is used by companies to account for credit losses as debits to Bad Debt Expense?
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Why are the balances per bank and per books seldom in agreement?
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What are some common reasons for disagreements in cash balances according to the text?
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How do companies classify receivables intended to be collected within a year or the operating cycle?
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Why is a four-column bank reconciliation important for businesses?
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What is the valuation basis for reporting short-term receivables?
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What is the main purpose of initially depositing all cash receipts in a bank account?
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Which method requires estimating both uncollectible receivables and any returns or allowances to be granted?
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Why is reconciliation necessary according to the text?
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What do companies record credit losses as, under the direct write-off method?
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Why do companies typically ignore interest revenue related to accounts receivable in practice?
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How are interest-bearing notes different from non-interest-bearing notes?
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Why are notes receivable considered fairly liquid?
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How do companies account for short-term notes receivable?
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When do companies record and report long-term notes receivable on a discounted basis?
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In what situations do companies accept notes receivable from customers?
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Why do companies often use notes in loans to employees and subsidiaries, and in sales of property, plant, and equipment?
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Study Notes
Bank Accounts
- Time deposit accounts have time restrictions for withdrawal
- Using a bank minimizes the amount of currency kept on hand and contributes to good internal control over cash
Bank Reconciliation
- Business uses a bank account to control cash, with all cash receipts deposited and payments made by check
- Double record of cash transactions is kept by the business and the bank
- Reasons for disagreements between bank and book balances include:
- Outstanding checks
- Deposits in transit
- Collections by bank
- Service charges
- Not-sufficient-funds (NSF) checks
- Errors by both parties
Four-Column Bank Reconciliation
- Used to reconcile cash balance reported in the bank statement with the balance in the depositor's ledger
Cash and Cash Equivalents
- Companies should state separately legally restricted deposits held as compensating balances against short-term borrowing arrangements
- Companies should classify restricted deposits held against long-term borrowing arrangements as non-current assets
Bank Overdrafts
- Occur when a company writes a check for more than the amount in its cash account
- Should be reported in the current liabilities section, added to accounts payable
- If material, should be disclosed separately on the statement of financial position or in notes
Accounts Receivable
- Are financial assets and financial instruments
- Classified as current or non-current based on expected collection time
- Further classified into trade and non-trade receivables
- Trade receivables include accounts receivable and notes receivable
- Accounts receivable are oral promises to pay for goods and services, expected to be collected within 30-60 days
- Notes receivable are written promises to pay a certain sum on a specified future date
Valuation of Receivables
- Classification involves determining the length of time each receivable will be outstanding
- Valuation involves estimating uncollectible receivables and returns or allowances to be granted
- Companies record credit losses as debits to Bad Debt Expense
Methods for Accounting for Uncollectible Accounts
- Direct Write-Off Method: charge loss to Bad Debt Expense when an account is deemed uncollectible
- Allowance Method: estimate uncollectible accounts and record as Bad Debt Expense
Notes Receivable
- Classified as interest-bearing or non-interest-bearing
- Interest-bearing notes have a stated rate of interest
- Zero-interest-bearing notes include interest as part of their face amount
- Companies frequently accept notes receivable from customers, employees, and subsidiaries
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Description
Test your knowledge on the recognition and valuation of accounts receivable, including classification as current or non-current assets. Understand how companies report and classify receivables on financial statements.