1 PowerPointPresentation by PowerPoint Presentation by Gail B. Wright Professor of Accounting Bryant University © Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star Logo, and South-Western are trademarks used herein under license. FINANCIAL ACCOUNTING 2 ND EDITION BY DUCHAC, REEVE, & WARREN 8 Receivables

2 CLASSIFYING RECEIVABLES Accounts receivable –Short term credit –30 – 60 days Notes receivable –Longer term –May be 1 year or more Other receivables Accounts receivable –Short term credit –30 – 60 days Notes receivable –Longer term –May be 1 year or more Other receivables LG 1

3 LG 2 What happens if customers don’t pay the balance on their receivables? Companies must recognize an expense to write off accounts that are not collectible.

4 RECEIVABLES WRITE- OFFS 2 methods to acknowledge uncollectible accounts expense –Direct write-off –Allowance method 2 methods to acknowledge uncollectible accounts expense –Direct write-off –Allowance method LG 2

5 DIRECT WRITE-OFF Bad debt expense recorded when account determined to be worthless. LG 3

6 ALLOWANCE METHOD Bad debt expense estimated at end of accounting period. LG 4

7 ESTIMATING UNCOLLECTIBLES 2 methods to estimate uncollectibles –Method #1 Based on % of sales –Method #2 Based on analyzing receivables 2 methods to estimate uncollectibles –Method #1 Based on % of sales –Method #2 Based on analyzing receivables LG 4

8 PERCENT OF SALES: Method #1 Bad debt expense is estimated by taking a percentage of period sales. LG 4

9 ExTone estimates that 1 1/2 % of 2008 credit sales ($3,000,000) will be uncollectible. $3,000,000 *.015 = $45,000

10 ANALYZING RECEIVABLES: Method #2 Bad debt expense is estimated by taking a percentage of overdue accounts. LG 4 Allowance is adjusted to a credit balance equal to the bad debt expense estimate.

11 EXHIBIT 2 LG 4

12 ADJUSTING ALLOWANCE: Credit Balance Allowance for Doubtful Accounts needs a balance of $3,390 LG 4 $3,390 - $510 = $2,880

13 LG 4 What happens if the allowance for doubtful accounts has a debit balance? The company wrote off more accounts than it had estimated.

14 EXHIBIT 2 LG 4

15 ADJUSTING ALLOWANCE: Debit Balance Allowance for Doubtful Accounts needs a balance of $3,390 LG 4 $3, = $3,690

16 LG 6 What is a note receivable? A note receivable is a written promise to pay money at definite time.

17 NOTES RECEIVABLE Have a maturity date –Due date for payment Pay interest Interest = Principal * Rate * Time Time is expressed as part of year Have a maturity date –Due date for payment Pay interest Interest = Principal * Rate * Time Time is expressed as part of year LG 6

18 EXAMPLE A company accepted a 12%, 30-day note receivable with a principal amount of $6,000. Interest due is $6,000 *.12 * 1/12 Interest due is $60 A company accepted a 12%, 30-day note receivable with a principal amount of $6,000. Interest due is $6,000 *.12 * 1/12 Interest due is $60 LG 6

19 6,000 ENTRY 11/21: Accepting Note Receivable Accepting a note receivable in payment of an account Has no effect on cash flows Has no net affect on balance sheet Has no effect on income statement LG 6 11/21 Note Receivable: WAB Co Acct Receivable: WAB Co SCFBSIS

20 ENTRY 12/21: Collecting Note Receivable Collecting a note receivable Increases cash flow, operations Has net increase on assets, equity on balance sheet Increases revenue on income statement LG 6 12/21 Cash Note Receivable: WAB Co Interest Revenue 6,060 6, SCFBSIS R

21 REPORTING RECEIVABLES Receivables expected to be collected within 1 year are classified as current assets Starbucks reports net accounts receivable of $140.2 million and Allowance for Doubtful Accounts of $2.2 million LG 7

22 LG 8 3 Steps for managing receivables are 1)Screening customers 2)Determining credit terms 3)Monitoring collections

23 ACCOUNTS RECEIVABLE TURNOVER Accounts receivable turnover measures how frequently accounts receivable are collected A/R Turnover = Net Sales/ Ave. Accounts Receivable Accounts receivable turnover measures how frequently accounts receivable are collected A/R Turnover = Net Sales/ Ave. Accounts Receivable LG 9

24 STARBUCKS’ TURNOVER Net Sales$5,294.2$4, Net A/R $ A/R turnover = $5,294.2/{( )/2} = 41.6 LG 9

25 DAYS IN SALES Days in sales estimates the length of time accounts receivable have been outstanding on average. Days in Sales = Ave. A/R / Ave. Daily Sales LG 9

26 STARBUCKS DAYS IN SALES Starbucks’ average days in sales for 2004 is ($127.3/ 14.5) = 8.8 Starbucks’ average days in sales for 2004 is ($127.3/ 14.5) = 8.8 LG 9

27 If you lend someone $20 and never see that person again, it was probably worth it. If you tell the truth, you don't have to remember anything.