Chapter 8 Reporting and Analyzing Receivables

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Chapter 8
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Chapter 8Reporting 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.

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Chapter 8Reporting 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.

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Receivables...

• Amounts due from individuals and companies -
  expected to be collected in cash.
• Frequently classified as
• _______________
• _______________
• _______________

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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 ________________.

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Problems with Accounts Receivable

• 1.
• 2.

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Accounts Receivables...

• Are reduced as a result of

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Notes Receivable...

• Represent claims for which formal instruments
  of credit are issued as evidence of debt.

2004
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Other Receivables

• Nontrade including
• interest receivable
• loans to company officers
• advances to employees
• income taxes refundable

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Accounts Receivable...

• Are recorded when service is provided or at
  point of sale of merchandise on account.

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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.
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2 Methods for Accounting for Uncollectible
Accounts

• The Direct Write-off Method
• The Allowance Method

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Direct Write-off Method

• Bad debt losses are not estimated.
• No allowance account is used.
• Accounts are written off when determined
  uncollectible as follows

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Direct Write-off Method Issue

• No attempt is made to match bad debts expense
  to sales revenue.

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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

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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.

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Recording Estimated Uncollectibles

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

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Cash (Net) Realizable Value...

• Is the net amount expected to be collected in
  cash.
• Excludes amounts the company estimates it will
  not collect.

Keeps receivables from being overstated on the
balance sheet.
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HAMPTON FURNITURE Balance Sheet (partial)

• Current assets
• Cash 14,800
• Accounts receivable 200,000
• Less Allowance for doubtful accounts
  12,000 188,000

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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

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Write-off of an Uncollectible Account

• The vice president of finance authorizes a
  write-off of 500 owed by R.A. Ware.

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Write-off of an Uncollectible Account

• Allowance for Doubtful
• Accounts 500
• Accounts Receivable-Ware 500

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Before Write-off

• Current assets
• Cash 14,800
• Accounts receivable 200,000
• Less Allowance for doubtful accounts
  12,000 188,000

After Write-off
Current assets Cash 14,800 Accounts
receivable 199,500 Less Allowance for doubtful
accounts 11,500 188,000
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Recovery of an Uncollectible Account

• Accounts Receivable-Ware 500
  Allowance
  for Doubtful
• Accounts
  500
• Cash 500
• Accounts Receivable 500

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Percentage of Receivables...

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

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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.

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Notes Receivable...

• Credit instrument normally requires
• payment of interest
• extends for time periods of 60-90 days or longer.

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Notes Receivable...

• Are often accepted from customers who need to
  extend payment of an account receivable.

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_______________
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.
Is the party to whom payment of a promissory note
is to be made.
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Formula for Interest
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Interest rate specified on a note is an _________
rate of interest. Prorate for shorter times
periods.

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Interest rate specified on a note is an
__________ rate of interest.
Time factor is often divided by 360 days1,000 x
.12 x 360 days/360 days
1,000 x .12 x 27 days/360 days1,000 x .12 x
46 days/360 days1,000 x .12 x 162 days/360
days1,000 x .12 x 265 days/360 days

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Notes Receivable...

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

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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.

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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.

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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.

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Receivables Turnover Ratio
Is a measure of the liquidity of receivables.
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Average Collection Period
Is the average amount of time that a receivable
is outstanding
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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.

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Credit Card

• Three parties are involved when national credit
  cards are used in making retail sales
• the credit card issuer
• the retailer
• the customer

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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.

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Advantages of Credit Cards to the Retailer
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Advantages of Credit Cards to the Retailer
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Advantages of Credit Cards to the Retailer
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Advantages of Credit Cards to the Retailer