30 Questions
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
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
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
What are the two classifications of receivables based on the time expected for collection?
Current (short-term) or non-current (long-term)
How are trade receivables usually sub-classified by a company?
Accounts receivable and notes receivable
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.
How does a company normally collect accounts receivable?
Within 30 to 60 days
What type of receivables arise from a variety of transactions other than sales?
Non-trade receivables
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.
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.
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.
What is the purpose of offering cash discounts (sales discounts) by companies?
To induce prompt payment from customers.
How are sales discounts generally presented in terms of payment?
Sales discounts are usually presented in terms like 2/10, n/30.
How do companies recognize sales discounts under the gross method?
Companies recognize sales discounts only when they receive payment within the discount period.
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.
How do companies typically treat interest revenue related to accounts receivable?
Companies ignore interest revenue related to accounts receivable
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
What is the valuation approach for short-term receivables?
Companies value and report short-term receivables at cash realizable value
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
How do companies record credit losses on uncollectible accounts?
Companies record credit losses as debits to Bad Debt Expense (or Uncollectible Accounts Expense)
What are the two methods used in accounting for uncollectible accounts?
The direct write-off method and the allowance method
What is the present value of a three-year, birr 10,000 zero-interest-bearing note received by Jemaneh Company?
birr 7,721.80
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
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.
What method does Jemaneh use to amortize the discount and recognize interest revenue on the zero-interest-bearing note?
Effective-interest method
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).
What happens at maturity when Jemaneh receives the face value of the zero-interest-bearing note?
Jemaneh receives the face value of the note.
Learn about trade discounts used by companies to alter prices for different quantities purchased and cash discounts offered to customers. Explore how discounts impact accounting records and sales revenue.
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