CASH chapter accounting part 2.docx

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Accounting & Financial Management
AFM 291
Richard Ennis

CASH DISCOUNTS - offered to encourage fast payment. ex: 2/10, n/30 means money due in 30 days by 2% discount if paid in 10 days 2.10 EOM,n/30 means money due end of next month but 2% discount if given by 10th day of next month - companies usually take the discounts unless they are handicapped for cash Net method: Sales made that are paid by the discount period are recorded at cash price, and customers who pay after discount period are also recorded at that price but have an entry for sales discount forfeited and is treated as an extra income like interest income - other revenue account. theoretically good, but not practical gross method: a/r is measured at gross amount and sales discounts are taken away at income statement- practical. sales discount forfieted: other revenue account see image on page 386 SALES RETURNS AND ALLOWANCES - are reported in the same period as the sales relate to - estimates are made and put in allowances. ex Astro corp thinks 5% of 1000000 sales are gonna be returned or allowances: sales returns and allowances…………...50,000 allowances for sales returns and allowances……...50,000 NON RECOGNITION OF INTEREST ELEMENT - ideally recievables are fair valued at present value of all cash flows. for example assume interest rate of 12% and recievable of $1000 to be recieved in 4 months. P.V = 961. Accountants don’t care about P.V in fair value in this case - trade recievables to which short term credit terms apply are not generally discounted MEASUREMENT OF A/R AFTER AQUISITION - next period A/R values are amortised values. for trade recievables as above (short term) it doesnt happen, but with loans rec or N/R with interest component it is. - this is done by both private equity GAAP and IFRS IMPAIRMENT OF A/R - referred to bad debts/uncollectible accounts ESTIMATING UNCOLLECTIBLE TRADE A/R - accounting
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