ACCT ch 7.txt

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ACCT ch 7.txt
2010-05-03 12:47:19
accounting spireland

fifth edition
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  1. What is the definition of a cash equivalent and what are some examples of financial instruments included in this category
    a cash equivalent is an investment that has a maturity date no longer than three months from the date of purchase. cash equivalents include such things as certain money market funds, treasury bills, and commercial paper
  2. What does a system of internal control refer to
    a system of internal control refers to a company's plan to (a) encourage adherence to company policies and procedures, (b) promote operation efficiency, (c) minimize errors and theft, and (d) enhance the reliability and accuracy of accounting data.
  3. How do the gross and net methods view cash discounts not taken?
    • the gross method views cash discounts not taken as part of sales revenue.
    • the net method considers cash discounts not taken as interest revenue
  4. If sales returns are material, how should they be accounted for?
    if returns are material, they should be estimated and recorded in the same period as the related sale. This is accomplished by recording adjusting journal entries at the end of an accounting period.
  5. What adjusting entry is required to record bad debts using the allowance method?
    The allowance method attempts to estimate future bad debts and match them with the related sales revenue. An adjusting entry records a debit to bad debt expense and a credit to allowance for uncollectible accounts, a contra account (valuation account) to accounts receivable.
  6. How are accounts receivable reported in the balance sheet?
    Accounts receivable are reported in the balance sheet net of the allowance for uncollectible accounts
  7. How are transferred receivables accounted for if the transferor surrenders control?
    If the transferor surrenders control over the receivables transferred, the arrangement is accounted for as a sale; otherwise, it's accounted for as a loan with receivables pledged as collateral
  8. What is the difference between an assignment and a pledging of accounts receivable?
    An assignment involves pledging of specific accounts receivables as collateral for a debt. A variation of assigning receivables is when accounts receivable in general, rather than specific receivables, are pledged as collateral. This variation is referred to as pledging accounts receivable
  9. Who assumes the risk of uncollectibility, the buyer of the seller, when accounts receivable are factored without recourse
    The Buyer
  10. What information is provided by the receivables turnover ratio? the average collection period?
    The receivables turnover ration indicates the number of times during a period that the average accounts receivable balance is collected. The average collection period is an approximation of the number of days the average accounts receivable balance is outstanding.
  11. Explain the allowance method of accounting for bad debts
    The allowance method estimates future bad debts in order to 1) match bad debt expense with the related revenues and 2) report accounts receivable in the balance sheet at net realizable valued. In an adjusting entry, we record bad debt expense and reduce accounts receivable indirectly by crediting a contra account to accounts receivable for an estimate of the amount that eventually will prove uncollectible.
  12. What approaches might Cisco have used to arrive at the $275 million bad debt provision?
    There are two ways commonly used to arrive at an estimate of future bad debt, the income statement approach and the balance sheet approach. Using the income statment approach, we estimate bad debt expense as a percentage of each period's net credit sales. The balance sheet approach determines bad debt expense by estimating net realizable value of accounts receivable. In other words, the allowance for uncollectible accounts is determined and bad debt expense is an indirect outcome of adjusting the allowance account to the desired balance.
  13. Are there any alternatives to the allowance method?
    An alternative to the allowance method is the direct write-off method. Using this method, adjusting entries are not recorded and any bad debt that does arise simply is written off as bad debt expense. Of course, if the sale that generated this receivable occurred in a previous recording period, this violates the matching principle. Operating expenses would have been understated and assets overstated that period. This is why the direct write off method is not permitted by GAAP except in limited circumstances.