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| accounts receivable turnover ratio |
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| A schedule (worksheet or spreadsheet) that shows a company’s accounts receivable and estimates uncollectible accounts by applying to the various age categories different percentages estimated to be uncollectible based on past experience. An aging schedule also identifies which accounts require special attention by indicating the extent to which certain accounts are past due. (p. 376). |
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| Occur when a company writes a check for more than the amount in its cash account. Companies should report bank overdrafts in the current liabilities section, adding them to the amount reported as accounts payable. If material, companies should disclose these items separately. (p. 368). |
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| Consists of coin, currency, and available funds on deposit at the bank, as well as negotiable instruments such as money orders, certified checks, cashier’s checks, personal checks, and bank drafts. Cash, the most liquid of assets, is the standard medium of exchange and the basis for measuring all other items. Companies generally classify cash as a current asset. (p. 366). |
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| Reductions from the sales price, offered by sellers to buyers to induce prompt payment. Also called sales discounts. Cash discounts generally read in terms such as 2/10, n/30 (2 percent if paid within 10 days, gross amount due in 30 days). Companies can account for sales discounts using either the gross or the net method; most use the gross method, in which they record sales and related sales discount transactions by entering the receivable and sale at the gross amount and using a Sales Discount account only when they receive payment within the discount period. (p. 371). |
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| Minimum cash balances in checking or savings accounts, required by some banks and other lending institutions in support for existing borrowing arrangements. Companies must disclose in the financial statements the details of deposits held as compensating balances. (p. 367). |
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| Sales of receivables to factors, finance companies or banks that buy receivables from businesses for a fee and then collect the remittances directly from the customers. (p. 386). |
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| The choice allowed by the FASB to use fair value in the financial statements as the basis of measurement for financial assets and liabilities. Under the fair value option, the item is recorded at fair value at each reporting date, and unrealized holding gains or losses are reported as part of net income. (p. 384). |
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| financial components approach |
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| Used to record a sale with recourse, where each party to the sale only recognizes the assets and liabilities that it controls after the sale. (p. 387). |
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| imputed interest rate (notes receivable) |
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| An approximated interest rate, used when a company cannot determine the interest rate of a note receivable because it has no ready market. To estimate the present value of the note, the company approximates an applicable interest rate, which may differ from the stated interest rate. (p. 382). |
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| The net amount the company expects to receive in cash. (pp. 372, 373). |
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| A method of determining bad debt expense, by simply reporting receivables in the statement of financial position at net realizable value. Also referred to as the statement of financial position approach. This approach gives a reasonably accurate estimate of the receivables’ realizable value, but it does not match cost and revenues. Companies may apply this method using one composite rate that reflects an estimate of the uncollectible receivables, or they may set up an aging schedule for particular account categories. (p. 376). |
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| A method of determining bad debt expense, in which a company converts the relationship between previous years’ credit sales and bad debts into a percentage and uses that percentage to determine the current year’s bad debt expense. To use this method, there must be a fairly stable relationship between previous years’ credit sales and bad debts. Because it relates the charge to the period in which a company records the sale, this method matches costs with revenues. Also referred to as the income statement approach. (p. 375). |
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| A written promise to pay a certain sum of money at a specific future date, in support of a note receivable. (p. 378). |
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| Material amounts of cash set aside for a particular purpose. Companies segregate restricted cash from “regular” cash for reporting purposes, and they classify restricted cash either in the current assets or in the noncurrent assets section, depending on the date of availability or disbursement. (p. 367). |
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| Reductions from the sales price, offered by sellers to buyers to induce prompt payment. Also called cash discounts. Cash discounts generally read in terms such as 2/10, n/30 (2 percent if paid within 10 days, gross amount due in 30 days). Companies can account for sales discounts using either the gross or the net method; most use the gross method, in which they record sales and related sales discount transactions by entering the receivable and sale at the gross amount and using a Sales Discount account only when they receive payment within the discount period. (p. 371). |
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| Reductions in sales prices, which companies use to avoid frequent changes in catalogs, to alter prices for different quantities purchased, or to hide the true invoice price from competitors. Trade discounts are commonly quoted in percentages. (p. 370). |
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| unrealized holding gain or loss (income) |
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| The net change in the fair value of a receivable from one period to another, exclusive of interest revenue recognized but not recorded. (p. 384). |
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| imprest system for petty cash |
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