Directory UMM :wiley:Public:college:accounting:kimmel:

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Financial Accounting:

Tools for Business Decision Making

Kimmel, Weygandt, Kieso

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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 maturity date of and interest on notes}

receivable.

 _{Describe the entries to record the disposition of notes}

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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}

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Receivables

 _{Refers to amounts due from individuals}

and companies - expected to be collected in cash

 _{Frequently classified as:}

 _{Accounts receivable}

 _{Notes receivable}

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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

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

Notes Receivable

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Credit instrument normally requires:

 _{payment of interest}

 _{extends for time periods of 60-90 days or}

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 _{Result from sale of goods and services}

 _{Often called}_{trade receivables}

 _{Give holder a stronger legal claim to}

assets than accounts receivable

 _{Negotiable instruments and may be}

transferred to another party by endorsement

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Notes and accounts receivables that

result from sales transactions.

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Other Receivables

Nontrade including:

 _{interest receivable}

 _{loans to company officers}

 _{advances to employees}

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Accounts Receivable

Are recorded at point of sale of

merchandise on account.

Accounts Receivable 100

Sales 100

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 _{The net amount expected to be collected} in cash

 _{Excludes amounts the company estimates} it will not collect

Cash (Net) Realizable Value

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Bad Debts Expense

Is an expense to record estimated uncollectible receivables.

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Two Methods for Accounting for

Uncollectible Accounts



The Allowance

Method



The Direct Write-off

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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}

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Percentage of Receivables

When management establishes a

percentage relationship between the

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Aging of Accounts Receivable

The analysis of customer balances by

the length of time they have been

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Allowance Method

Hampton Furniture has credit sales of

$1,200,000 for 1999, 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

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HAMPTON FURNITURE Balance Sheet (partial)

Page 343 in Book

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)

Page 343 in Book

Current assets

Cash $ 14,800

Merchandise Inventory 310,000

Prepaid Expense 25,000

Total current assets $537,800

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Allowance Method

The vice president of finance authorizes a

write-off of $500 owed by R.A.Ware.

Allowance for Doubtful

Accounts 500

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Current assets Cash $ 14,800

Current assets

Cash $ 14,800

Before Write-of

After Write-of

Cash Realizable Value

Cash Realizable Value

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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:

Bad Debts Expense 200

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 _{Are often accepted from customers who}

need to extend payment of an account receivable.

 _{Are often required}

from high-risk customers.

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Notes Receivable

 _{The life of a note may be expressed in}

months or days.

 _{When the life of a note is expressed in}

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Notes Receivable

 _{When the due date is stated in terms}

of days, it is necessary to count the exact number of days to determine the maturity date.

 _{In counting, the date the note is}

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Maturity Date

Term of note 60 days July (31-17) 14

August 31 45

Maturity date, September 15

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Promissory Note

A written promise to pay a specified amount of money on demand or at a definite time.

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Maker

Is the party in a promissory note who is making the promise to pay.

Payee

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Notes Receivable

 _{A note is recorded at}

face value without interest added.

 _{Notes receivable are}

reported at cash (net) realizable value.

 _{A note is honored}

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 _{Interest revenue is recorded when the}

note is paid.

 _{If interim financial statements}

are prepared, interest on

notes receivable is accrued.

 _{If a note is not paid in full at}

maturity, it is called a

dishonored note.

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 _{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 temporary investments.

 _{The gross amount of receivables and the}

allowance for doubtful accounts should be

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 _{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 non-operating section of the income statement.

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Managing Receivables

 _{Determine to whom to extend credit}  _{Establish a payment period}

 _{Monitor collections}  _{Evaluate receivables}

balance.

 _{Accelerate cash}

receipts from

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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}

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Payment Period

 _{Determine a required payment period}

and communicate that policy to customers.

 _{Make sure the}

company's payment period is consistent with that of

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Monitoring Collections

 _{Calculate the company’s credit risk ratio}  _{Prepare accounts receivable aging}

schedule at least monthly

 _{Pursue problem}

accounts with:

 _{phone calls}  _letters

 _{legal action, if}

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Credit Risk Ratio

A measure of the risk that a company’s customers may not pay their accounts

Credit Risk Ratio =

Allowance for Doubtful Accounts Accounts Receivables

Changes in credit risk ratio over time

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Concentration of Credit Risk

A threat of nonpayment from a single

customer or class of customers that

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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

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Receivables Turnover Ratio =

This is a measure of the liquidity

of receivables.

Net Credit Sales

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Average Collection Period =

Is the average amount of time that a

receivable is outstanding.

365 days

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Accelerating Cash Receipts

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A bird in the hand is

worth two in the bush.

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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}

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Factor

A finance company or bank that buys receivables from businesses for a fee and then collects

payments

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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}

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Credit Card

A common type of credit card is a

national credit card

 _Visa

 _{Master Card}

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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}

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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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Page 360 in book

Advantages of Credit

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Page 360 in book

Advantages of Credit

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