introduction chapters
chapter 7
Accounts Receivable
goals discussion
goals
achievement
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in the blanks
multiple
choice
problems
check list and key terms
Following is a "checklist" of selected key concepts that are likely to be included on an exam. Review and check-off each noted item to be certain that important concepts have not been overlooked in your study.
Understand the costs and benefits of credit.
Note the distinction between trade and nontrade receivables.
Identify the benefits to a firm that arise out of credit card sales.
What is the difference (operationally and from an accounting perspective) between bank and nonbank card sales?
Be able to apply the direct write-off method.
Know the deficiencies of the direct write-off method.
Understand the general impact of the allowance methods for uncollectible accounts, and know why the method is preferred over the direct write-off approach.
Define "net realizable value."
Apply the balance sheet approaches to estimate uncollectible accounts.
Be able to prepare an aging of accounts receivable.
Apply the income statement approaches to estimate uncollectible accounts.
Know how to write off an account, and reinstate an account previously written off, using the allowance method.
Be able to calculate the accounts receivable turnover ratio and the average collection period, and understand their importance.
What is the difference between an account receivable and a note receivable?
Be able to define terms related to notes (e.g., maker, payee, principal, etc.).
How is "interest" on an obligation calculated?
Be able to account for the various phases in the life cycle of a note, including issuance, interest accruals, and maturity.
Know how to account for the dishonor of a note.
KEY TERMS AND DEFINITIONS (with links to discussion in text)
| accounts receivable | Amounts due from customers from credits sales of products or services; "trade receivables" |
| aging of accounts receivable | Analysis used to estimate the uncollectible accounts; involves stratification of receivables based upon age |
| allowance method for uncollectibles | A method that estimates uncollectibles as a portion of total receivables and establishes an offsetting contra allowance account |
| direct write-off method | A simple, non-GAAP, method that expenses uncollectible accounts only as they are determined to be uncollectible and are written off |
| dishonoring a note | To fail to pay a note at maturity |
| interest | The charge imposed on the borrower of funds for the use of money |
| maker | The party creating the a note and agreeing to make payment |
| maturity date | The date on which a note and related interest are due to be paid |
| maturity value | The amount due at maturity of a note; includes principal and interest |
| net realizable value | The amount of cash expected to be collected on outstanding accounts receivable; accounts receivable minus the allowance for uncollectibles |
| nontrade receivables | Amounts due from transactions and events not directly related to sales of products or services |
| notes receivable | A written promise from a client or customer to pay a definite amount of money on a specific future date |
| payee | The party to whom a note is made payable |
| principal | The basic stated amount of a note on which interest is usually calculated; generally relating to the amount borrowed |
| trade receivables | Amounts due from customers from credits sales of products or services |