1. Spiceland | Thomas | Herrmann Financial Accounting Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Receivables and Sales Chapter 5

2. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5-2 Learning Objectives Recognize accounts receivable Calculate net revenues using discounts, returns, and allowances Record an allowance for future uncollectible accounts Use the aging method to estimate future uncollectible accounts Apply the procedure to write off accounts receivable as uncollectible

3. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5-3 Learning Objectives Contrast the allowance method and direct write- off method when accounting for uncollectible accounts Apply the procedure to account for notes receivable, including interest calculation Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables Estimate uncollectible accounts using the percentage-of-credit-sales method

4. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5-4 Part A Recognizing Accounts Receivable

5. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5-5 Learning Objective 1 Recognize accounts receivable

6. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5-6 Credit Sales Transfer products and services to a customer today and collecting payment in the future Also known as sales on account or services on account Common for large business transactions

7. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5-7 Accounts Receivable Cash owed to the company by its customers from sales on account Recorded at the time of the credit sale Also called trade receivables

8. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5-8 Other Types of Receivables Nontrade receivables: receivables that originate from sources other than customers Notes receivable: formal credit arrangements evidenced by a written debt instrument, or note

9. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5-9 Learning Objective 2 Calculate net revenues using discounts, returns, and allowances

10. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5-10 Net Revenues Net revenues A company’s total revenues less any discounts, returns, and allowances Also referred to as net sales Net Revenues Sales Discounts Sales Returns and Allowances −= Sales −

11. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5-11 Trade Discount Reduced from the list price of a product or service Not recognized directly

12. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5-12 Sales Returns and Allowances Sales Return Seller issues a full refund Customer returns the product Sales Allowances Seller reduces the customer’s balance owed partially Customer does not return the product

13. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5-13 Contra Revenue Account Opposite balance to that of its related revenue account To keep a separate record of the total revenue earned and reduction due to subsequent sales allowances

14. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5-14 Sales Discount Reduced from the amount to be paid by a credit customer If payment is made within a specified period of time Recognized directly Discount terms Eg: 2/10, n/30

15. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5-15 Part B Valuing Accounts Receivable

16. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5-16 Learning Objective 3 Record an allowance for future uncollectible accounts

17. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5-17 Allowance Method Allows for the possibility that some accounts will be uncollectible Companies are required to: Estimate future uncollectible accounts Record estimates in the current year Uncollectible accounts: Customers’ accounts that are no longer considered collectible Reduces assets (accounts receivable) Increases expenses (bad debt expense)

18. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5-18 Illustration 5.3—The Financial Statement Effects of Accounting for Future Uncollectible Accounts

19. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5-19 Estimating Uncollectible Accounts Percentage-of-receivables method Based on the percentage of receivables expected not to be collected Also called the balance sheet method Percentage-of-credit-sales method Also called the income statement method

20. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5-20 Estimating Uncollectible Accounts Bad Debt Expense: uncollectible accounts expense or provision for doubtful accounts Allowance For Uncollectible Accounts: contra asset account representing the amount of accounts receivable that we do not expect to collect

21. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5-21 Illustration 5.5—Accounting for Uncollectible Accounts and the Accounts Receivable Portion of the Balance Sheet

22. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5-22 Learning Objective 4 Use the aging method to estimate future uncollectible accounts

23. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5-23 Aging of Accounts Receivable More accurate than using single percentage Considers the age of receivables Using a higher percentage for older accounts

24. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5-24 Learning Objective 5 Apply the procedure to write off accounts receivable as uncollectible

25. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5-25 Writing Off Accounts Receivable Write-off has no effect on total amounts reported Negative effects already recorded

26. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5-26 Learning Objective 6 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts

27. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5-27 Direct Write-Off Method Records bad debt expense when uncollectible account is known Used: When uncollectible accounts are not anticipated or are immaterial When it’s not possible to reliably estimate uncollectible accounts For tax purposes only

28. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5-28 Illustration 5.12—Comparison of the Allowance Method and the Direct Write-off Method for Recording Uncollectible Accounts

29. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5-29 Part C Notes Receivable

30. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5-30 Learning Objective 7 Apply the procedure to account for notes receivable, including interest calculation

31. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5-31 Notes Receivable Similar to accounts receivable but are more formal Evidenced by a written debt instrument, or note Classified as either current or noncurrent asset

32. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5-32 Interest Calculation Kimzey issued a $10,000 six-month, 12% promissory note

33. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5-33 Collection of Notes Receivable & Accrued Interest

34. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5-34 Learning Objective 8 Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables

35. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5-35 Receivables Turnover Ratio Number of times the average accounts receivable balance is collected

36. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5-36 Average Collection Period Number of days the average accounts receivable balance is outstanding

37. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5-37 Learning Objective 9 Estimate uncollectible accounts using the percentage-of-credit-sales method

38. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5-38 Percentage-of-Credit-Sales Method Estimates uncollectible accounts based on the percentage of credit sales Adjusts allowance for doubtful accounts

39. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5-39 Adjusting for Estimates of Uncollectible Accounts

40. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5-40 End of Chapter 5