Cash and cash equivalents
Cash equivalents are short-term, highly liquid investments with an original maturity of three months or less from the date of purchase (e.g., T-bills purchased one month before maturity). A restricted cash balance (e.g., compensating balance required by a loan agreement) is excluded from "cash" and separately classified based on when the restriction lapses.
Estimating credit losses: CECL
Under ASC 326 (Current Expected Credit Losses), companies estimate lifetime expected credit losses on receivables at initial recognition — not just losses that have already been "incurred," as under the old model. This means the allowance is set up immediately when a receivable is recorded, based on historical experience, current conditions, and reasonable forecasts.
IMPORTANT: Allowance for credit losses is a contra-asset. Writing off a specific account debits the allowance and credits accounts receivable — it does not touch bad debt expense again, since the expense was already recognized when the allowance was established.
Factoring receivables
| Type | Treatment |
|---|---|
| Without recourse | Sale — receivable removed from books, loss recognized for the discount |
| With recourse | Treated as a sale only if the transferor surrenders control (per ASC 860); otherwise treated as a secured borrowing |
EXAM TIP: "Recourse" means the factor can come back to the seller if customers don't pay. Recourse alone doesn't automatically block sale treatment — control must actually transfer per the ASC 860 criteria.