Question

Accounts and notes receivable are reported in the current (SO 9) assets section of the balance sheet at: a. cash (net) realizable value b. net book value. c. lower-of-cost-or-market value. d. invoice cost.

Short answer

Accounts and notes receivable are reported at cash (net) realizable value (option a).

Step-by-step solution

Identify the Definition of Terms

The exercise asks us to determine how accounts and notes receivable are reported in the current assets section of a balance sheet. Before choosing the correct option, we need to know what each of the options— cash (net) realizable value, net book value, lower-of-cost-or-market value, and invoice cost—means in accounting terms.

Understand Accounts and Notes Receivable Reporting

Accounts and notes receivable represent amounts owed to a company by customers for goods or services provided on credit. These are considered current assets on the balance sheet. They are typically valued at their cash (net) realizable value, which is the amount expected to be converted into cash, considering potential uncollectible accounts (bad debts).

Review Each Option's Relevance

- **Cash (net) realizable value**: This is the expected amount of cash to be received, accounting for doubtful accounts. - **Net book value**: This usually refers to the value of an asset after accounting for depreciation or amortization, not typically used for accounts receivable. - **Lower-of-cost-or-market value**: Used primarily for inventory, not applicable to receivables. - **Invoice cost**: Represents the original cost as per the invoice, not adjusted for potential uncollectibles.

Select the Correct Answer

Since accounts and notes receivable are adjusted for potential bad debts to represent the actual value that can be converted to cash, the term that correctly fits this description is "cash (net) realizable value". Thus, the most appropriate option is (a).

Key concepts

Cash (Net) Realizable Value

When businesses report accounts and notes receivable, they do so using the cash (net) realizable value. This accounting method considers the eventual cash expected to be collected from these receivables, minus any estimated uncollectible amounts. This means that if some customers might not pay their dues, the business estimates this bad debt and reduces the receivable value reported.

This net amount provides a realistic view of how much money a company expects to receive. It is essential for accuracy since it reflects the amount that could truly bolster a company's cash flow. Knowing this helps businesses plan better and make informed financial decisions.

• Ensures realistic cash expectations.
• Accounts for potential customer defaults.
• Improves financial statement accuracy.

Balance Sheet

The balance sheet is a financial statement that provides a snapshot of a company's financial health at a given moment. It lists the company's assets, liabilities, and shareholders' equity. By presenting these elements clearly, it shows what the company owns and owes.

Accounts and notes receivable are categorized as assets on the balance sheet. They are key components of an entity's resources, signifying funds that will soon convert into cash. This section is critical for stakeholders as it informs them of the liquidity and potential future cash inputs.

• Displays financial health.
• Divides into assets, liabilities, and equity.
• Helps assess liquidity and solvency.

Current Assets

Current assets are those resources expected to be converted into cash within one year. They include cash, inventory, and receivables like accounts and notes receivable. For a business, these assets represent the funds available to manage daily operations without needing to tap into long-term resources.

On the balance sheet, accounts and notes receivable appear as significant current assets. They indicate that funds will soon flow into the company, offering a cushion for current operational needs. This classification also hints at the company’s ability to settle short-term obligations efficiently.

• Convert to cash within a year.
• Includes receivables and inventory.
• Vital for assessing operational liquidity.

Accounting Terms

Understanding accounting terms is essential for comprehending financial statements. Terms like accounts receivable, net realizable value, and cash flow are foundational in recognizing how a business tracks and reports its financial activities.

Accounts receivable are amounts due from customers, while net realizable value accounts for the likelihood that not all those amounts will be collected. This term emphasizes the importance of accurate valuation in bookkeeping. Knowledge of these terms is vital for interpreting financial health and dynamics.

• Clarifies financial reports.
• Enables accurate valuation.
• Essential for understanding company finances.