chapter 08.ppt accounting wiley.........

accounting ch8

1. 1
Financial Accounting:
Tools for Business Decision Making, 3rd Ed.
Kimmel, Weygandt, Kieso
ELS

2. 2
Chapter 8

3. 3
Chapter 8
Reporting and Analyzing
Receivables
After studying Chapter 8, you should
be able to:
Identify the different types of receivables.
Explain how accounts receivable are recognized in
the accounts.
Describe the methods used to account for bad
debts.
Compute the interest on notes receivable.
Describe the entries to record the disposition of
notes receivable.

4. 4
Chapter 8
Reporting and Analyzing
Receivables
After studying Chapter 8, you should
be able to:
Explain the statement presentation of
receivables.
Describe the principles of sound accounts
receivable management.
Identify ratios to analyze a company's
receivables.
Describe methods to accelerate the receipt of
cash from receivables.

5. 5
Receivables...
Amounts due from individuals and
companies - expected to be collected
in cash.
Frequently classified as:
Accounts receivable
Notes receivable
Other receivables

6. 6
Receivables Differ Depending On...
Industry
Time of year
Whether the company extends long-
term financing
Credit policies

7. 7
Accounts Receivable...
Amounts owed by customers on account.
Result from the sale of goods/services.
Expected to be collected within 30-60
days.
Most significant type of claim held by
company.
Often called trade receivables.

8. 8
Problems with Accounts Receivable
Recognizing accounts receivable.
Valuing accounts receivable.

9. 9
Accounts Receivables...
Are reduced as a result of:
•Sales discounts
•Sales returns and allowances

10. 10
Represent claims for which formal
instruments of credit are issued as
evidence of debt.
Notes Receivable...
2004

11. 11
Other Receivables
Nontrade including:
interest receivable
loans to company officers
advances to employees
income taxes refundable

12. 12
Accounts Receivable...
Are recorded when service is provided
or at point of sale of merchandise on
account.
Accounts Receivable 100
Sales 100

13. 13
Bad Debts Expense...
Is an expense to record estimated
uncollectible receivables.
Keeps expenses from being understated
on the income statement and accounts
receivables from being overstated on the
balance sheet.

14. 14
2 Methods for Accounting for
Uncollectible Accounts
The Direct Write-off
Method
The Allowance Method

15. 15
Direct Write-off Method
Bad debt losses are not estimated.
No allowance account is used.
Accounts are written off when
determined uncollectible as follows:
Bad Debts Expense 200
Accounts Receivable--M. E. Doran 200
Bad debt expense will show only actual losses.
Accounts receivable will be reported at gross
amount.

16. 16
Direct Write-off Method Issue
No attempt is made to match bad debts
expense to sales revenue.

17. 17
Allowance Method
Uncollectible accounts receivable are
estimated and matched against sales in
the same accounting period in which the
sales occurred.
Uncollectible accounts receivable may be
estimated using:
Percentage of sales
Aging of accounts receivable

18. 18
Recording Estimated
Uncollectibles
Hampton Furniture has credit sales of
$1,200,000, of which $200,000 remains
uncollected. The credit manager estimates
$12,000 will prove uncollectible.
Bad Debts Expense 12,000
Allowance for Doubtful
Accounts 12,000

19. 19

Bad Debts Expense 12,000
Allowance for Doubtful
Accounts 12,000

Accounts Receivable
Allowance for
Doubtful Accounts
Jan 1 Bal 200,000 Jan 1 Bal 12,000
Recording Estimated
Uncollectibles

20. 20
Is the net amount expected to be
collected in cash.
Excludes amounts the company
estimates it will not collect.
Cash (Net) Realizable Value...
Keeps receivables from being overstated
on the balance sheet.

21. 21
HAMPTON FURNITURE
Balance Sheet (partial)
Current assets
Cash $ 14,800
Accounts receivable $200,000
Less: Allowance for doubtful accounts 12,000 188,000

Cash (net) Realizable Value

22. 22
HAMPTON FURNITURE
Balance Sheet (partial)
Current assets
Cash $ 14,800
Accounts receivable $200,000
Less: Allowance for doubtful accounts 12,000 188,000
Merchandise Inventory 310,000
Prepaid Expense
25,000
Total current assets $537,800

23. 23
The vice president of finance authorizes a
write-off of $500 owed by R.A. Ware.
Allowance for Doubtful
Accounts 500
Accounts Receivable-Ware 500

Write-off of an
Uncollectible Account

24. 24
Write-off of an
Uncollectible Account
Allowance for Doubtful
Accounts 500
Accounts Receivable-Ware 500
Accounts Receivable
Allowance for
Doubtful Accounts
Jan 1 Bal 200,000 Mar 1 500
Mar 1 Bal 199,500
Jan 1 Bal 12,000Mar 1 500
Mar 1 Bal 11,500

25. 25
Current assets
Cash $ 14,800
Accounts receivable $200,000
Less: Allowance for doubtful accounts 12,000 188,000

Current assets
Cash $ 14,800
Accounts receivable $199,500
Less: Allowance for doubtful accounts 11,500 188,000

Before Write-off
After Write-off
Cash Realizable Value
Cash Realizable Value

26. 26
Recovery of an
Uncollectible Account
Accounts Receivable-Ware 500
Allowance for
Doubtful
Accounts 500
Cash 500
Accounts Receivable 500

27. 27
Percentage of Receivables...
Management establishes a
percentage relationship between the
amount of receivables and the
expected losses from uncollectible
accounts.

28. 28
Aging of Accounts Receivable
The analysis of customer balances by
the length of time they have been
unpaid. The longer a
debt is outstanding
the less likely it
is to be
paid.

29. 29
Notes and accounts
receivables that
result from sales
transactions.
Trade Receivables...

30. 30
Notes Receivable...
Credit which is extended by use of a
formal instrument.

31. 31
Credit instrument normally requires:
payment of interest
extends for time periods of 60-90 days or
longer.
Notes Receivable...

32. 32
Notes Receivable...
Are often accepted from customers
who need to extend payment of an
account receivable.
Are often required
from high-risk customers.

33. 33
Represent claims for which formal
instruments of credit are issued as
evidence of debt.
Notes Receivable...
2004

34. 34
Maker
Is the party in a promissory note who is
making the promise to pay.
Payee
Is the party to whom payment of a
promissory note is to be made.
Payee
Is the party to whom payment of a
promissory note is to be made.

35. 35
Formula for Interest

36. 36
Interest rate specified on a
note is an annual rate of
interest.
Prorate for shorter times periods.
1,000 x .12 x 12 months/12months
1,000 x .12 x 1 month/12months
1,000 x .12 x 3 months/12months
1,000 x .12 x 6 months/12months
1,000 x .12 x 9 months/12months

37. 37
Interest rate specified on a
note is an annual rate of
interest.
Time factor is often divided by
360 days
1,000 x .12 x 360 days/360 days
1,000 x .12 x 27 days/360 days
1,000 x .12 x 46 days/360 days
1,000 x .12 x 162 days/360 days
1,000 x .12 x 265 days/360 days

38. 38
Notes Receivable...
are recorded at face
value.
are reported at
cash (net) realizable
value.
are honored when
paid in full at
maturity.
are dishonored
when not paid in
full at maturity.

39. 39
Notes Receivable...
Interest revenue is recorded when
the note is paid.
If interim financial statements are
prepared, interest on notes
receivable is accrued.

40. 40
Notes Receivable...
Each type of receivables should be
identified in the balance sheet or in the
notes to the financial statements.
Short-term receivables are reported in the
current asset section of the balance sheet
below short-term investments.
The gross amount of receivables and the
allowance for doubtful accounts should
be reported.

41. 41
Notes Receivable...
Notes receivable are listed before
accounts receivable because
notes are more easily converted
to cash.
Bad debts expense is reported as
a selling expense in the income
statement.
Interest revenue is shown under
other revenues and gains in the
nonoperating section of the
income statement.

42. 42
Managing Receivables
Determine to whom to extend credit.
Establish a payment period.
Monitor collections.
Evaluate receivables balance.
Accelerate cash receipts from receivables
when necessary.

43. 43
Extending Credit
Risky customers might be required to
provide letters of credit or bank
guarantees.
Risky customers might be required to pay
cash on delivery (COD).
Ask potential customers for references
from banks and suppliers and check the
references.
Periodically check financial health of
continuing customers.

44. 44
Payment Period
Determine a required payment
period and communicate that policy
to customers.
Make sure company's
payment period is
consistent with that of
competitors.

45. 45
Monitoring Collections
Calculate company’s credit risk
ratio.
Prepare accounts receivable aging
schedule at least monthly.
Pursue problem accounts
with:
phone calls
letters
legal action if
necessary.

46. 46
Concentration of Credit Risk
Is there a threat of nonpayment from a single
customer or class of customers that could adversely
affect the financial health of the company.

47. 47
Evaluating the
Receivables Balance
Liquidity is measured by how quickly
certain assets can be converted into cash.
The receivables turnover ratio measures
the number of times, on average,
receivables are collected
during the period.

48. 48
Receivables Turnover Ratio=
Net Credit Sales
Average Net Receivables
Is a measure of the liquidity
of receivables.

49. 49
Average Collection Period=
365 days
Receivables Turnover Ratio
Is the average amount of time that
a receivable is outstanding

50. 50
Accelerating Cash Receipts
Waiting for the normal
collection process cost money.

51. 51
Accelerating Cash Receipts
A bird in the hand is
worth two in the
bush.

52. 52
Companies Sell Receivables
They get more sales if they provide
financing to customers.
General Motors Acceptance Corporation
Ford Motor Credit Corporation
They may be the only
reasonable source of cash.
Billing and collection are often
time-consuming and costly.

53. 53
Factor...
Is a finance company or bank that
buys receivables from businesses for a
fee and then collects
payments directly
from the
customers.

54. 54
Expense Associated with Selling
Receivables
If a company usually sells its receivables,
the service charge expense is recorded as
a selling expense.
However, if receivables are sold
infrequently the fee may be reported
under other expenses and losses in the
income statement.

55. 55
Credit Card
A common type of
credit card is a
national credit
card such as:
 Visa
 Master Card
American Express

56. 56
Credit Card
Three parties are involved when
national credit cards are used in
making retail sales:
the credit card issuer
the retailer
the customer

57. 57
Bank Credit Card
Sales resulting from the use of VISA and
MasterCard are considered cash sales by
the retailer.
Upon receipt of credit card sales slips
from a retailer, the bank immediately
adds the amount to the seller's bank
balance.

58. 58
Advantages of Credit
Cards to the Retailer

59. 59
Advantages of Credit
Cards to the Retailer

60. 60
Advantages of Credit
Cards to the Retailer

61. 61
Advantages of Credit
Cards to the Retailer

62. 62
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