Book cover for Intermediate Accounting

Intermediate Accounting

Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield

ISBN #9780470374948

13th Edition

695 Questions

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7,109 Students Helped

Homework Questions

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Summary
Learning Objectives
Key Concepts
Example Problems
Explanations
Common Mistakes

Summary

Chapter 7 on Cash and Receivables emphasizes the proper identification, measurement, and reporting of cash and various receivable accounts. It highlights the importance of recognizing and valuing accounts receivable and notes receivable accurately, particularly by using allowances for doubtful accounts to reflect potential uncollectibility. Additionally, the chapter discusses how manipulative practices, like creating cookie jar reserves, can distort reported net income and undermine transparency in financial reporting.

Learning Objectives

1

Explain the identification, measurement, and reporting of cash and receivables.

2

Describe how accounts receivable and notes receivable are recognized and valued.

3

Understand the role and calculation of allowances for doubtful accounts in financial reporting.

4

Analyze how practices like 'cookie jar reserves' can affect reported net income and overall transparency.

Key Concepts

CONCEPT

DEFINITION

Cash

Liquid assets available for immediate use in transactions and financial reporting.

Accounts Receivable

Amounts owed to a company by its customers for goods or services delivered on credit.

Notes Receivable

Written promises that require a customer to pay a certain amount at a future date, often with interest.

Allowance for Doubtful Accounts

A contra-asset account that reduces accounts receivable to the amount expected to be collectible.

Cookie Jar Reserves

Excess reserves set aside during good periods that might be used to smooth earnings and manipulate reported net income.

Example Problems

Example 1

What is the time value of money? Why should accountants have an understanding of compound interest, annuities, and present value concepts?

Example 2

Identify three situations in which accounting measures are based on present values. Do these present value applications involve single sums or annuities, or both single sums and annuities? Explain.

Example 3

What is the nature of interest? Distinguish between 'simple interest" and "compound interest."

Example 4

What are the components of an interest rate? Why is it important for accountants to understand these components?

Example 5

Presented below are a number of values taken from compound interest tables involving the same number of periods and the same rate of interest. Indicate what each of these four values represents. (a) 6.71008 (b) 2.15892 (c) .46319 (d) 14.48656
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Step-by-Step Explanations

QUESTION

How do you compute the net accounts receivable if the total accounts receivable are $150,000 and the allowance for doubtful accounts is $15,000?

STEP-BY-STEP ANSWER:

Step 1: Identify the total accounts receivable, which is $150,000.
Step 2: Identify the allowance for doubtful accounts, which is $15,000.
Step 3: Subtract the allowance from the total accounts receivable to obtain the net accounts receivable.
Final Answer: Net accounts receivable = $150,000 - $15,000 = $135,000.

Calculating Net Accounts Receivable

QUESTION

What are the key steps in valuing notes receivable?

STEP-BY-STEP ANSWER:

Step 1: Record the face value of the note receivable as the initial value.
Step 2: Include any accrued interest as per the note's terms.
Step 3: Assess and deduct for any potential uncollectibility if necessary.
Final Answer: The value of notes receivable is calculated by adding accrued interest to the face value and adjusting for any anticipated uncollectibility.

Valuing Notes Receivable

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Common Mistakes

  • Failing to adjust gross receivables for the allowance for doubtful accounts, leading to an overstated asset value.
  • Confusing cash with receivables, which are distinct in terms of liquidity and reporting.
  • Misunderstanding the concept of 'cookie jar reserves' and its impact on net income.
  • Neglecting the importance of detailed disclosures regarding the risk of uncollectibility in financial statements.