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Chapter 7

Cash most liquid oI assets; standard mediumoI exchange and the basis Ior measuring and accounting Ior all other items
Postdated checks and I.O.U.s are considered receivables Ior companies
Postage stamps on hand are classiIied as part oI oIIice supplies inventory or as a prepaid expense
Petty cash Iunds and change Iunds are used to meet current operating expenses and liquidate current liabilities; included in current assets as cash
Cash equivalents are short-term, highly liquid investments that are both readily convertible to known amounts oI cash, and so near their maturity that they present insigniIicant riskoI changes in value because oI changes in interest rates.
CertiIicates oI deposit represent Iormal evidence oI indebtedness
Treasury bills are U.S. government obligations generally issued with 4-, 13-, and 26- week maturities
Commercial paper is a short-termnote issued by corporations with good credit ratings
Restricted cash is classiIied in the current assets or in the long-termassets section, depending on the date oI availability or disbursement
Compensating balances portion oI any demand deposit (or any time deposit or certiIicate oI deposit) maintained by a corporation which constitutes support Ior existing borrowing arrangements oI the corporation with a lending institution (minimumcash balances in checking or savings accounts)
Bank overdraIts occur when accompany writes a check Ior more than the amount in its cash account
Receivables are claims held against customers and others Ior money, goods, or services
For Iinancial statement purposes, companies classiIy receivables as either current (short-term) or noncurrent (long-term).
Companies expect to collect current receivables within a year or during the current operating cycle, which is longer
ClassiIy all other receivables as noncurrent
Trade receivables customers oIten owe a company amounts Ior goods bought or services rendered; usually the most signiIicant itemit possesses, into accounts receivable and notes receivable
Accounts receivable are oral promises oI the purchaser to pay Ior goods and services sold
Notes receivable are written promises to pay a certain sumoI money on a speciIied Iuture date
Nontrade receivables arise Iroma variety oI transactions.
Example oI nontrade receivables are 1) advances to oIIicers and employees 2) advances to subsidiaries 3) deposits paid to cover potential damages or losses 4) deposits paid as a guarantee oI perIormance or payment 5) dividends and interest receivable 6) claims against:
Insurance companies Ior casualties sustained and deIendants under suit and governmental bodies Ior taxreIunds and common carriers Ior damaged or lost goods and creditors Ior returned, damaged, or lost goods and customers Ior returnable items (crates, containers, etc).
Basic issues in accounting Ior accounts and notes receivable are the same: recognition, valuation, and disposition
The exchange price is the amount due Iromthe debtor (a customer or a borrower).
Trade discounts are used to avoid Irequent changes in catalogs, to alter prices Ior diIIerent quantities purchased, or to hide the true invoice price Iromcompetitors
Cash discounts (sales discounts) induce prompt payment
Companies value and report short-termreceivables at net realizable valuethe net amount they expect to receive in cash
Direct write-oII method- when a company determines a particular account to be uncollectible, it charges the loss to Bad Debt Expense (oIten used Ior taxpurposes) contend that it records Iacts, not estimates
As a result, using the direct write-oII method is not considered appropriate, except when the amount uncollectible is immaterial
Allowance method involves estimating uncollectible accounts at the end oI each period
Net realizable value is the net amount the company expects to receive in cash
Companies do not close Allowance Ior DoubtIul Accounts at the end oI the Iiscal year
Under the allowance method, companies debit every bad debt write-oII to the allowance account rather than to Bad Debt Expense
Note that the recovery oI a bad debt, like the write-oII oI a bad debt, aIIects only balance sheet accounts
Two bases are used to determine this amount: 1) percentage oI sales, and 2) percentage oI receivables
Percentage-oI-sales management estimates what percentage oI credit sales will be uncollectible
Percentage-oI-receivables approach (balance sheet approach) it simply reports receivables in the statement oI Iinancial position at net realizable value
Aging schedule applies a diIIerent percentage based on past experience to various age categories
Promissory note written promise to pay a certain sumoI money at a speciIic Iuture date
Zero-interest bearing notes include interest as part oI their Iace amount
To estimate the present value oI a note under such circumstances, the company must approximate an applicable interest rate that may diIIer Iromthe stated interest rate. imputation; the resulting interest rate is called an imputed interest rate
The computations and estimations involved in valuing short-termnotes receivable and in cording bad debt expense and the related allowance exactly parallel that Ior trade accounts receivable
Impaired a notes receivable is considered that when it is probable that the creditor will be unable to collect all amounts due (both principal and interest) according to the contractual terms oI the receivable
Fair value option the receivables are recorded at Iair value, with unrealized holding gains or losses reported as part oI net income
Unrealized holding gain or loss is the net change in the Iair value oI the receivable Iromone period to another, exclusive oI interest revenue
Factoring receivables is traditionally associated with the textile, apparel, Iootwear, Iurniture, and home Iurnishing industries
Securitization takes a pool oI assets such as credit card receivables, mortgage receivables, or car loan receivables, and sells shares in these pools oI interest and principal payments
When buying receivables without recourse, the purchaser assumes the riskoI collectability and absorbs any credit losses
For receivables sold with recourse, the seller guarantees payment to the purchaser in the event the debtor Iails to pay
To record this type oI transaction, the seller uses a Iinancial components approach, because the seller has a continuing involvement with the receivable
Accounts receivable turnover ratio measures the number oI times, on average, a company collects receivables during the period
Bank reconciliation is a schedule explaining any diIIerences between the bank`s and the company`s records oI cash
Impairment calculated as the diIIerent between the investment in the loan (generally the principal plus accrued interest) and the expected Iuture cash Ilows discounted at the loan`s historical eIIective interest rate

Chapter 8
Inventories are asset items that a company holds Ior sale in the ordinary course oI business, or goods that it will use or consume in the production oI goods to be sold
Merchandise inventory cost assigned to unsold units leIt on hand
Rawmaterials inventory accost assigned to goods and materials on hand but not yet placed into production
Work in process inventory the cost oI the rawmaterial Ior these unIinished units, plus the direct labor cost applied speciIically to this material and a ratable share oI manuIacturing overhead costs
Finished goods inventory - costs identiIied with the completed but unsold units on hand at the end oI the Iiscal period
Perpetual inventory systemcontinuously tracks changes in the Inventory account
Periodic inventory system, a company determines the quantity oI inventory on hand only periodically, as the name implied
ModiIied perpetual inventory system this systemprovides detailed inventory records oI increases and decreases in quantities onlynot dollar amounts
I.o.b. shipping point, title passes to Walgreens when the supplier delivers the goods to the common carrier, who acts as an agent Ior Walgreens
I.o.b. destination, title passes to Walgreens only when it receives the goods Iromthe common carrier
Product costs are those costs that 'attach to the inventory
Period costs are those costs that are indirectly related to the acquisition or production oI goods
The FASBruled that companies should capitalize interest costs related to assets constructed Ior internal use or assets produced as discrete projects (such as ships or real estate projects) Ior sale or lease
Purchase Discounts account in a period inventory systemindicates that the company is reporting its purchases and accounts payable at the gross amount
Gross method it reports purchase discounts as a deduction Irompurchases on the income statement
Net oI the cash discounts the company records Iailure to take a purchase discount within the discount period in a Purchase Discounts Lost account
Net method it considers purchased discounts lost as a Iinancial expense and reports it in the 'other expenses and losses section oI the income statement
SpeciIic identiIication calls Ior identiIying each itemsold and each itemin inventory
There is no requirement that the cost Ilowassumption adopted be consistent with the physical movement oI goods
Average cost method prices items in the inventory on the basis oI the average cost oI all similar goods available during the period
FIFOmethod assumes that a company uses goods in the order in which it purchases them.
The Iirst goods purchased are the Iirst used (in a manuIacturing concern) or the Iirst sold (in a merchandising concern)
LIFO method matches the cost oI the last goods purchased against revenue
It assumes that the cost oI the total quantity sold or issued during the month comes Iromthe most recent purchases
LIFO method results in diIIerent ending inventory and cost oI goods sold amounts than the amounts calculated under the periodic method
Dollar-value LIFOmethod determines and measures any increases and decreases in a pool in terms oI total dollar value, not the physical quantity oI the goods in the inventory pool
LIFOliquidations can occur Irequently when using a speciIic-goods LIFOapproach

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