What Type Of Receivable Is Evidenced By A Formal Inst 612508
1what Type Of Receivable Is Evidenced By A Formal Instrument And Norm
1) What type of receivable is evidenced by a formal instrument and normally requires the payment of interest?
A note receivable. A note receivable is evidenced by a formal written instrument, usually a promissory note, which explicitly details the amount owed, interest rate, and maturity date. It typically involves interest payments over the period until maturity. Conversely, accounts receivable and past-due receivables are usually informal promises to pay, and trade receivables are a broader category of receivables arising from sales transactions.
2) When is a receivable recorded by a service organization?
A receivable is recorded when service is provided on account. According to revenue recognition principles, the receivable is recognized when the service has been rendered, irrespective of payment being received, which aligns with accrual accounting standards (FASB, 2020). This ensures the matching of revenue with the related expenses, giving an accurate picture of financial health.
3) At what value are accounts receivable reported on the balance sheet?
Accounts receivable are reported at their net realizable value— the amount the company expects to collect. This considers potential allowances for doubtful accounts, providing a realistic estimate of cash inflows (Kieso, Weygandt, & Warfield, 2019).
4) Short-term notes receivable are reported at their cash (net) realizable value.
True. Short-term notes receivable are reported at their cash (net) realizable value, which is the face amount minus any estimated uncollectible amounts or discounts, aligning with the conservatism principle in accounting.
5) Which one of these statements about promissory notes is incorrect ?
A promissory note is not a negotiable instrument. This statement is incorrect because promissory notes are indeed negotiable instruments, meaning they can be transferred or endorsed to third parties, facilitating liquidity and liquidity management (IFRS, 2021).
6) Which of the following should be classified as an “other" receivable?
Interest receivable. Other receivables include miscellaneous claims not arising from core operations, such as interest receivable, taxes receivable, or receivables from lawsuits.
7) What type of receivables result from sales transactions?
Trade receivables. These are receivables arising directly from the sale of goods or services in the normal course of business.
8) Which one of the following is not a method used by companies to accelerate cash receipts?
Writing off receivables. Writing off receivables does not accelerate cash receipts; instead, it recognizes bad debts and diminishes receivable balances.
9) Which of the following accounts is debited when a company factors its accounts receivable?
Interest Expense. When receivables are factored with recourse, interest expense or loss on sale of receivables is debited, reflecting the cost of factoring. Typically, the Accounts Receivable account is credited as it is removed from the books.
10) Which of the following is the value at which loans and receivables should be reported under IFRS?
Amortized cost. Under IFRS 9, loans and receivables are reported at amortized cost, reflecting the effective interest rate method adjusted for impairment (IASB, 2014).
Paper For Above instruction
Receivables are a fundamental component of a company's assets, reflecting amounts owed by customers and others for goods supplied or services rendered, and are crucial for managing cash flow and liquidity. Understanding the different types of receivables, their accounting treatment, and valuation is essential for financial reporting and decision-making.
Among the various receivables, note receivables stand out because they are evidenced by formal instruments, usually promissory notes, which specify payment terms including interest, maturity date, and principal amount. The formal nature of notes provides clarity and legal enforceability, making them more liquid than informal accounts receivable (Kieso, Weygandt, & Warfield, 2019). Typically, a note receivable involves periodic interest payments and is recognized as such on the balance sheet, often at amortized cost or net realizable value, reflecting the amount expected to be collected.
The recognition of receivables by service organizations follows distinct principles. When a service is rendered on account, the receivable is recorded at that moment, aligning with the revenue recognition principle based on the completion of performance obligations (FASB, 2020). This approach ensures sales and receivables are accurately reflected in the financial statements, regardless of cash receipt timing.
In terms of valuation, accounts receivable are generally reported at net realizable value, which accounts for allowances for doubtful accounts, providing a realistic estimate of future cash inflows (Kieso et al., 2019). This approach adheres to the conservatism principle, ensuring assets are not overstated. Short-term notes receivable, which are typically due within a year, are also reported at their cash or net realizable value, with any discounts or allowances deducted.
Promissory notes are prominent examples of formal receivables representing monetary obligations. These notes are negotiable instruments, meaning they can be transferred or endorsed, facilitating liquidity and transferability of receivables (International Financial Reporting Standards [IFRS], 2021). The incorrect notion that promissory notes are not negotiable contradicts their legal and functional characteristics, which support market efficiency.
Other receivables encompass miscellaneous claims not arising from core business activities, such as interest receivable, taxes receivable, or receivables from transactions outside usual sales channels. Interest receivable, for instance, arises from investments or lending activities and is classified as an 'other' receivable.
The receivables resulting from typical sales transactions are classified as trade receivables, which include accounts receivable arising from the sale of goods and services. These are the most common receivables and are closely monitored to manage collections and maintain liquidity (Kieso et al., 2019).
Various methods exist to accelerate cash receipts from receivables. Offering discounts for early payments, such as trade discounts or cash discounts, encourages quicker settlements. Conversely, methods like accepting credit cards or selling receivables to a factor also enable faster cash flow. However, writing off receivables is a way to recognize bad debts, not a tool to accelerate collection (LLoyd & Fain, 2020).
When companies factor their receivables, they typically debit interest expense or a loss account, especially if the sale is with recourse, and credit the accounts receivable account, removing it from the books. Factoring provides immediate cash but may involve costs or loss recognition.
Under IFRS 9, loans and receivables are measured at amortized cost, which considers the time value of money and adjusts for impairments (IASB, 2014). This measurement approach aims to reflect the true value of future cash inflows, providing a reliable basis for financial analysis and decision making.
In summary, understanding the characteristics, valuation, and accounting treatment of receivables underpins sound financial management and reporting. Formal instruments like promissory notes offer liquidity advantages, while proper recording and valuation at net realizable or amortized cost ensure accurate financial statements. Recognizing the distinct nature of trade, non-trade, and other receivables facilitates appropriate management and reporting in accordance with accounting standards.
References
- Financial Accounting Standards Board (FASB). (2020). Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers.
- International Accounting Standards Board (IASB). (2014). IFRS 9 Financial Instruments.
- International Financial Reporting Standards (IFRS). (2021). IFRS Conceptual Framework.
- Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate Accounting (16th ed.). Wiley.
- Lloyd, A., & Fain, P. (2020). Managing Accounts Receivable. Journal of Financial Management, 48(2), 123-135.