ACG 3103 Chapter 6 (Intermediate Financial Accounting)

Cash Equivalents

1. Post-Dated Checks: Are checks which cannot be depsoited in a future date.

2. IOU's: Represent an amount that is owed to the company

*Both are classfied as receivables.

Restricted Cash: Cash that is restricted for a certain purpose. If it is restricted for a current obligation, then it is considered a current asset, however, if it is restricted for a long-term obligation, then it is considered a long-term asset.

A Compensating Balance is the minimum amount a lender requires a borrower to keep in their account as a condition for receiving a loan.


-Compensating Balances against short-term borrowing should be classfied as a current asset and a part of "Cash and Cash Equivalents"

-Compensating Balances against long-term borrowing should be classied as a noncurrennt asset under investments or other assets section, and naming it "Cash on deposit maintained as compensating balance"

Ban Overdraft: When you spend more money then what is in your account, so the bank covers the transaction and you have to pay it off later

*Classfied as a Current liabiility

1. A Short Term Paper is a short term (under a year) debt agreement (basically a loan)

2.
-When the investment matures in less than 3 months : It is considered a Cash Equivalent
-When the investment matures 3 months - 12 months: It is considered a Short-Term Investment

1. Travel Advance: A travel advance is a pre-approved sum of money given by an employer or organization to an employee before a business trip

2. Classfied as a receivable

1. Postage on Hand: It is postages that the company has not used yet.

2. It is classfied as a Prepaid Expense.

1. Trade Receivable: Amounts owed to a company by customers for good(s) or service(s) sold

2. Non-Trade Receivable: Amounts owed to a company from sources outside of its primary, everyday business operations

1.
Accounts Receivables: Informal agreement based on an invoice
Notes Receivables: Binding by a contract signed by both parties

2.
Accounts Receivables: Typically has no interest
Notes Receivables: Typically has interest

3.
Accounts Receivables: Always Short-term
Notes Receivables: Can be short-term (less than one year) or long-term

Fixed Consideration: Unchaning payment amount

Variable Consideration: Payment amount can flucate based on future events ( (1) trade discounts, (2) cash discounts, (3) sales returns and allowances, and (4) time value of money. )

"A trade discount is a reduction from a product's regular catalog or list price, offered by a manufacturer or wholesaler to a buyer "

A sales discount is a reduction in the price of a product or service that a seller offers to a customer as an incentive to pay an invoice early

1) 2/10, n/30:
Get a 2% discount if you pay within 10 days, but must pay the full amount in 30 days

2) 2/10, E.O.M., net 30, E.O.M. :
Get a 2% discount if paid any time by the 10th day of the following month, with full payment due by the 30th of the following month)

Gross Method: Records accounts receivable and sales revenue at the full gross price (Assuming that the customer will nottake the cash discount)

Net Method: Records accounts receivable and sales revenue at the price after discount (Asumming that the customer will take the cash discount)

Direct Write-Off Method for Uncollectible Accounts (Non-GAAP):
-As soon as you determine an accounts receivable is uncollectible, you put the loss towards 'Bad Debt Expense'


Allowance Method for Uncollectible Accounts (GAAP):
-In the adusting entry at the end of the period, you estimate the amount of accounts receivables which will go uncollectible. Then, when you know the exact accounts receivable which will become uncollectible, then you reduce the "Allowance to Bad Debts" (Contra-Asset Account) and just reduce accounts receivables.

The amount of cash a company genuinely expects to collect from its customers

1) Composite Rate Approach
-You have a Composite Rate (Which you can develop in any way), which is the % of all receivables which will be uncollectable.
-Relatively lower precision compared to Aging Schedule Approach


2) Aging Schedule Approach
*Shown in Image
-Gives different % of accounts receivables which would be uncollectible based on how many days have passed since the invoice was issued (or became past due).
-So, the longer the amount of days have, the higher the estimated % will be uncollectible.

1) The 'Allowance for Doubtful Accounts' has a credit balance of \$800
-This means that the company overestimated and did not write off as many accounts receivables as uncollectible as expected. They overestimated by \$800.

-In this case, you minus \$800 from the adjusting entry (as in in subtract 800 from both 'Bad Debt Expense' & 'Allowance for Doubtful Accounts') you woud have made if you had a beginning balance of 0. So, if you calculated \$2,000 for your estimated Allowance for Doubtful Accounts, you now have to take into account the beginning balance and subtract the 2,000 by 800.

2) The 'Allowance for Doubtful Accounts' has a debit balance of \$800
-This means that the company underestimated the amount of accounts receivables that would be uncollectible. They underestimated by \$800.

-In this case, you add \$800 from the adjusting entry (as in in add 800 from both 'Bad Debt Expense' & 'Allowance for Doubtful Accounts') you woud have made if you had a beginning balance of 0. So, if you calculated \$2,000 for your estimated Allowance for Doubtful Accounts, you now have to take into account the beginning balance and add the 2,000 by 800.

The current expected credit loss (CECL) model that requires companies to measure expected uncollectible accounts and record bad debt expense on all receivables

1) Interest-bearing notes: A note that has a stated interest rate


2) Zero-interest-bearing notes : A note that does not have a stated interest rate.
-PS: Zero Interest Notes will not have explicit interest rate; however, the borrower is issued at a discount to the face value. (Meaning they they for example get \$100 but will have to pay the face value of \$109 next year. This functions the same as interest, without having an explict interest rate.)