Question

Could you give me an answer fast you can please. Thank You.!

Learning Objectives: CHAPTER 5

1. Account for short-term investments
2. Apply GAAP for proper revenue recognition
3. Account for and control accounts receivable
4. Evaluate collectability using the allowance for uncollectible accounts
5. Account for notes receivable
6. Show how to speed up cash flow from receivables
7. Evaluate liquidity using three new ratios

EXAMPLE OF WHAT I'M LOOKING FOR:

One thing I found challenging was the credits and debits concept from chapter two and matching them up, (common stock would be a cash debit and stock credit). Once I got it down it was one of those "why didn't it make sense to me sooner" moments but at the time I didn't understand and would switch things. How I approached the chapter was really to make sure I understood all the terms, ie notes payable, accounts receivable, etc. Being able to understand them without going back to the textbook made the process a bit faster and overall easier. Another thing was really taking advantage of the internet and that if there was something in the textbook I didn't understand, looking it up on Google and going through different websites and tutorials. While going through the problems I made sure to take as thorough notes as I could with information that I knew would help me moving forward, targeting the problems that were difficult for me. Being able to go back and read through something that was written in a way that made the most sense to me as an individual definitely proved helpful. I also Skyped a friend who is currently enrolled in a financial accounting class and we would work through problems together.

Answer 1

1. Short term invetments have more liquity at the time of their maturity. Since by the name itself indicating, they are short term say, with in 1 year only (some rare cases 3 to 5 years). Regarding to Accounting for short term invetments they are accounted at their realizable values. Any increase in market values of short term Invetments in their holding period will be ignored and any fall down in market values need creation of provision in income statement. Only cash rich companies goes for this invetments mainly because of their capital appreciations, they are accounted throughly at its realizable value.

2. Revenue should be recognized only when all risks and rewards are transferred to the buyer in a sale transaction. That is to say in case of defferment of delivery revenue need to be recognized from sale, even if good sold lying with seller. This is because all costs for generating final salable goods are debited corresponding credit should be given for the revenue to satisfy matching concept. Further in case items are not sold they remain at closing inventory and inventory should be maintained at cost, then also matching concept satisfied.

Hence matching concept plays a major role in revenue recognition.

3. The whole concept of account receivable arises in case of credit sales only. They have debit balance because more or less it means that company is investing it's worth in credit sales. As a normal way of doing business credit sales are unavoidable therefore account receivables too. At the beginning of every year opening account receivable should be adjusted for any advance received from the customers. Since we recognize revenue from sales including credit sales in income statement, we need to create an asset for the amount which need to be receivable. As it has debit balance, it need to be credited for collection from debtors, any discount on collection to them and for any bad debts etc.

4. Allowences are major boosters for collecting money as soon as possible.

Allowences in forms of Rebates, Discouts, cutoffs and Discount for early payments.

Uncollectible accounts are may be aged debtors, loans or advances given. When no payment is received even after the credit period allowed in case of debtors and maturity date in case of loans and advances(i.e., no payments after due dates for a long time) then they be eligible for treatment as uncollectible accounts. Expenses incurred incurred for uncollectible accounts should be debited to income statement as and when incurred.

5. Notes receivable are current assets and they should be on the asset side in the balance sheet. They are given for less than one year.

They are mainly promise. Holder will get the amount on the expiry of the date mentioned in the note. Basically it includes interest and principle amount. On maturity date, when the note receivable matured interest component should go to the income statement. In case any income in the form interest yet to be received should shown on asset side.

6. Our amount is blocked in the receivabes as per credit period offered to them. What if length of credit period is high. Our amount is blocked more time and it effects working capital requirements of the organization.

Therefore to speed up the cash flows from receivables one should carefully analyse the credit period and fix a flexible credit period. Others means of speeding up the cash flows are offering Discouts, Rebates, payoffs for early payments etc.. and invoicing the client as soon as possible is another option. May be selling the whole debtors to a collection agency is better for speeding up cash inflows but it involves costs, therefore entity should go for this only when it is viable only.

7. Liquidity ratios tells about how well company is able to repay the debts as and when they due.

That is company credibility is based on liquidity ratios. There are three ratios which are known as liquidity ratios, they are current ratio, quick ratio and absolute liquidity ratio.

Current ratio means current assets ÷ current liabilities. It takes all forms of current assets and current liabilities into consideration. Let it be cash, debtors, stock, Bank, any loans and advances, prepaid expenses etc. And creditors, Bank OD, any outstanding expenses etc. It is the basic ratio. An ideal current ratio must be 2:1.

Quick ratio means current assets less inventory and prepaid expenses÷current liabilities. Since it follows best conservative apporach, it is best method of liquidity.

Absolute liquidity ratio means cash and marketable securities÷current liabilities. This ratio is more concerned about Short term liquidity for a organization. That's why it takes most liquid assets into consideration.