Trade and Cash Discounts in Accounting

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How should companies report assets that are not cash but are short-term in nature?

As temporary investments

What are compensating balances in the context of restricted cash?

Minimum cash balances required by banks or lending institutions

In what instances do companies segregate restricted cash from regular cash for reporting purposes?

When restricted cash is material in amount

How do companies classify restricted cash in their financial statements?

Either in current assets or non-current assets Signup and view all the answers

When is it appropriate to classify restricted cash in the current assets section?

When using the cash for payment of existing or maturing obligations within a year or operating cycle Signup and view all the answers

Where do companies show restricted cash in the statement of financial position if holding the cash for a longer period of time?

Non-current assets section Signup and view all the answers

What are the two classifications of receivables based on the time expected for collection?

Current (short-term) or non-current (long-term) Signup and view all the answers

How are trade receivables usually sub-classified by a company?

Accounts receivable and notes receivable Signup and view all the answers

What is the difference between accounts receivable and notes receivable?

Accounts receivable are oral promises of the purchaser to pay for goods and services sold, while notes receivable are written promises to pay a certain sum of money on a specified future date. Signup and view all the answers

How does a company normally collect accounts receivable?

Within 30 to 60 days Signup and view all the answers

What type of receivables arise from a variety of transactions other than sales?

Non-trade receivables Signup and view all the answers

What are notes receivable and where do they come from?

Written promises to pay a certain sum of money on a specified future date, they may arise from sales, financing, or other transactions. Signup and view all the answers

What are trade discounts used for by companies?

To avoid frequent changes in catalogs, alter prices for different quantities purchased, or hide the true invoice price from competitors. Signup and view all the answers

How do companies record sales revenue when a trade discount is given?

Companies record their receivable and related sales revenue at the discounted price, not the initial list price. Signup and view all the answers

What is the purpose of offering cash discounts (sales discounts) by companies?

To induce prompt payment from customers. Signup and view all the answers

How are sales discounts generally presented in terms of payment?

Sales discounts are usually presented in terms like 2/10, n/30. Signup and view all the answers

How do companies recognize sales discounts under the gross method?

Companies recognize sales discounts only when they receive payment within the discount period. Signup and view all the answers

What is the difference between the gross method and the net method of recording sales discounts?

Under the gross method, sales discounts are deducted from sales to arrive at net sales, while under the net method, sales are recorded at the net amount after deducting the available cash discount. Signup and view all the answers

How do companies typically treat interest revenue related to accounts receivable?

Companies ignore interest revenue related to accounts receivable Signup and view all the answers

How do companies classify receivables based on their intended collection time frame?

Companies classify receivables intended to be collected within a year or the operating cycle as current, and all other receivables as non-current Signup and view all the answers

What is the valuation approach for short-term receivables?

Companies value and report short-term receivables at cash realizable value Signup and view all the answers

How do companies determine cash realizable value for receivables?

Determining cash realizable value requires estimating uncollectible receivables and any returns or allowances to be granted Signup and view all the answers

How do companies record credit losses on uncollectible accounts?

Companies record credit losses as debits to Bad Debt Expense (or Uncollectible Accounts Expense) Signup and view all the answers

What are the two methods used in accounting for uncollectible accounts?

The direct write-off method and the allowance method Signup and view all the answers

What is the present value of a three-year, birr 10,000 zero-interest-bearing note received by Jemaneh Company?

birr 7,721.80 Signup and view all the answers

What is the implicit rate that equates the total cash to be received (birr 10,000 at maturity) to the present value of the future cash flows (birr 7,721.80) for Jemaneh Company's note?

9 percent Signup and view all the answers

How does Jemaneh record the initial entry for the zero-interest-bearing note received?

Debits notes receivable for the present value (birr 7,721.80) and credits cash for the same amount. Signup and view all the answers

What method does Jemaneh use to amortize the discount and recognize interest revenue on the zero-interest-bearing note?

Effective-interest method Signup and view all the answers

How does Jemaneh record interest revenue at the end of the first year for the zero-interest-bearing note?

Debits notes receivable and credits interest revenue for the calculated amount (694.96 birr). Signup and view all the answers

What happens at maturity when Jemaneh receives the face value of the zero-interest-bearing note?

Jemaneh receives the face value of the note. Signup and view all the answers