Chap007 - Chapter 07 - Cash and Receivables Chapter 7 Cash...

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Chapter 07 - Cash and Receivables 7-1 Chapter 7 Cash and Receivables Question 7-1 Cash equivalents usually include negotiable instruments as well as highly liquid investments that have a maturity date no longer than three months from date of purchase. Question 7-2 Internal control procedures involving accounting functions are intended to improve the accuracy and reliability of accounting information and to safeguard the company’s assets. The separation of duties means that employees involved in recordkeeping should not also have physical responsibility for assets. Question 7-5 Yes, IFRS and U.S. GAAP differ in how bank overdrafts are treated. Under IFRS, overdrafts can be offset against other cash accounts. Under U.S. GAAP overdrafts must be treated as liabilities. QUESTIONS FOR REVIEW OF KEY TOPICS
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7-2 Answers to Questions (continued) Question 7-7 The gross method of accounting for cash discounts considers discounts not taken as part of sales revenue. The net method considers discounts not taken as interest revenue, because they are viewed as compensation to the seller for allowing the buyer to defer payment. Question 7-8 When returns are material and a company can make reasonable estimates of future returns, an allowance for sales returns is established. At a financial reporting date, this provides an estimate of the amount of future returns for prior sales, and involves a debit to sales returns and a credit to allowance for sales returns for the estimated amount. Allowance for sales returns is a contra account to accounts receivable. When returns actually occur in the future reporting period, the allowance for sales returns is debited. Answers to Questions (continued) Question 7-10 The income statement approach to estimating bad debts determines bad debt expense directly by relating uncollectible amounts to credit sales. The balance sheet approach to estimating future bad debts indirectly determines bad debt expense by estimating the net realizable value for accounts receivable that exist at the end of the period. In other words, the allowance for uncollectible accounts at the end of the period is estimated and then bad debt expense is determined by adjusting the allowance account to reflect net realizable value. Question 7-11 A company has to separately disclose trade receivables and receivables from related parties under U.S. GAAP, but not under IFRS. Question 7-13 The accounting treatment of receivables factored with recourse depends on whether certain criteria are met. If the criteria are met, the factoring is accounted for as a sale. If they are not met, the factoring is accounted for as a loan. In addition, note disclosure may be required. Accounts receivable factored without recourse are accounted for as the sale
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This note was uploaded on 03/12/2011 for the course ACCT 3110 taught by Professor Cutler during the Spring '08 term at North Texas.

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Chap007 - Chapter 07 - Cash and Receivables Chapter 7 Cash...

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