Receivables Flashcards
Are amounts due from officers, employees, or stockholders included in accounts receivable?
No, they are reported separately
What value should accounts receivable be reported at?
Net Realizable Value, which is the gross amount of accounts receivable less allowance for doubtful/uncollectible accounts
What is Net Realizable Value?
The amount owed to us that we expect to convert to cash within one year or the accounting cycle, whichever is longer.
What three methods are used for calculating bad debt expense?
1) Direct Write-off method
2) Income statement method (% of sales approach)
3) Balance sheet method (% of receivable approach)
Why is the Direct Write-off method not consistent with GAAP?
Because not MATCHING expense at time of sale and it is not CONSERVATIVE as A/R is carried at its full face/gross amount
What method for calculating bad debt expense results in better matching?
Income statement method (% of sales approach)
What method for calculating bad debt expense results in better asset valuation?
Balance sheet method (% of receivables approach)
What is the journal entry to write off receivables?
Dr. Allowance for doubtful accounts
Cr. A/R
Does writing off of receivables have an effect on their Net Realizable Value?
No, it has no effect on receivables’ NRV.
How is the recovery of previously written off receivables recorded?
Effectively as if you wrote off the wrong account (actually a net of TWO J/E’s):
Dr. Cash received
Cr. Allowance for doubtful accounts
How might a company generate cash from receivables before collecting cash from the customer?
1) Pledging
2) Assigning
3a) Factoring (sale with recourse)
3b) Factoring (sale without recourse)
4) Discounting (used for longer term)
What is meant by pledging a receivable?
Offering (“pledging”) the receivable asset to the lender as collateral to secure the loan. When this occurs, it must be adequately disclosed in a footnote in the financial statements.
What is meant by assigning a receivable?
Borrowing cash from a lender in exchange for agreeing to used the proceeds from a specific receivable asset to repay the lender. Sometimes, the customer is notified to make payment directly to the lender instead of the client.
What is meant by factoring without recourse?
Selling a receivable asset to another party (the factor), with the buyer assuming the risk that the receivable may not be collectible. This usually involves a “premium” that the seller “pays” in the form of receiving less of a cash payment.
What is meant by factoring with recourse?
Selling a receivable to another party (the factor), with the buyer retaining the right to demand that the client make good on the receivable if the customer does not pay as promised. Given the “recourse” that the buyer has, there is less of a premium that the seller “pays” and, as such, receives a higher amount of a cash payment relative to a similar transaction without recourse.
Which factoring method would generally, all things being equal, result in a greater amount of cash up front?
Factoring with recourse
Which factoring method results in writing off the receivable?
Factoring without recourse
Which factoring method results in keeping the liability and creating a separate liability?
Factoring with recourse
What is it called when the client borrows the necessary cash, and offers the receivable to the lender as collateral in order to secure the loan?
Pledging a receivable
What is it called when the client borrows the necessary cash, and agrees to use the proceeds from the receivable to repay the lender?
Assigning a receivable
What is it called when the client sells the receivable to another party, with the buyer assuming the risk that the receivable may not be collectible?
Factoring a receivable without recourse
What is it called when the client sells the receivable to another party, with the buyer retaining the right to demand that the client make good on the receivable if the customer does not pay as promised?
Factoring a receivable with recourse
What three conditions satisfy a sale (surrender) of receivable assets to another party?
1) Transferred financial instruments have been isolated beyond the reach from the transferor and its creditors (to include bankruptcy)
2) Transferees have the right to pledge or exchange the asset received without restrictions and without providing more than a trivial benefit to the transferor
3) Transferor does not maintain effective control over the financial instrument (doesn’t include any repurchase clauses on the specific assets)
* *Effectively, the receivable has been a) “transferred out of our reach”, b) “the purchaser can do anything they want with it”, and c) “there aren’t any buyback agreements”
When pledging or assigning receivables, does the firm remain the legal owner of the financial asset?
Yes
