8 Receivables

FINANCIAL ACCOUNTING
2ND EDITION BY DUCHAC, REEVE, & WARREN
Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star Logo, and South-Western are trademarks used herein under license.

PowerPoint Presentation by

LEARNING GOALS

When you finish this chapter, you should be able to

LEARNING GOALS LEARNING GOALS

1. Describe common classifications of receivables. 2. Describe nature, accounting for uncollectible receivables. 3. Describe direct write-off method to account for uncollectible receivables.
Continued
3

LEARNING GOALS LEARNING GOALS

4. Describe allowance method to account for uncollectible receivables. 5. Compare direct write-off vs. allowance methods to account for uncollectible receivables. 6. Describe nature, characteristics, accounting for notes receivable.
Continued
4

LEARNING GOALS LEARNING GOALS

7. Describe reporting for receivables on balance sheet. 8. Describe principles for managing accounts receivable. 9. Compute, interpret accounts receivable turnover, number days sales in receivables.
5

STARBUCKS CORPORATION
Starbucks Corporation Invoices local businesses for coffee service on-premises Payment due after delivery Trust allows businesses with good history to use trade credit

LEARNING GOALS LEARNING GOALS

Describe common classifications of receivables.

LG 1

Why do companies sell on credit?

Offering credit allows companies to sell more product.

8

LG 1

CLASSIFYING RECEIVABLES
Accounts receivable Accounts receivable
Short term credit Short term credit 30 60 days 30 60 days

Notes receivable Notes receivable

Longer term Longer term May be 1 year or more May be 1 year or more

Other receivables Other receivables

9

LEARNING GOALS LEARNING GOALS

Describe nature, accounting for uncollectible receivables.

10

LG 2

What happens if customers dont pay the balance on their receivables? Companies must recognize an expense to write off accounts that are not collectible.
11

LG 2

RECEIVABLES WRITERECEIVABLES WRITEOFFS OFFS

2 methods to acknowledge 2 methods to acknowledge uncollectible accounts expense uncollectible accounts expense
Direct write-off (not allowed by Direct write-off (not allowed by GAAP) GAAP) Allowance method Allowance method

12

LEARNING GOALS LEARNING GOALS

Describe direct writeoff method to account for uncollectible receivables.

13

LG 3

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

14

LG 4

ALLOWANCE METHOD

Bad debt expense estimated at end of accounting period.

15

LG 4

How would estimating bad debt expense affect financial statements?

Click the button to skip this journal entry
16

LG 4

ENTRY 12/31: Bad Debt Expense

Estimate
SCF BS IS E

12/31 Bad Debt Expense Allowance

40,000 40,000

Estimating bad debt expense Has no effect on cash flows Decreases assets, equity on balance sheet Increases expense on income statement
17

LG 4

How would writing off an account under the allowance method affect financial statements?
Click the button to skip this journal entry
18

LG 4

ENTRY 1/21: Write-off

SCF BS IS

1/21 Allowance for Dbtfl Accts 6,000 Acct Receivable: JP 6,000

Writing off an account receivable Has no effect on cash flows Has no effect on total assets on balance sheet Has no effect on income statement

19

LG 3

What happens if an account previously written off is subsequently collected?

Click the button to skip this journal entry

How would collection of written-off account affect financial statements?

20

LG 4

ENTRY 6/10: Collection

SCF BS IS

11/21 Acct Receivable: NS Allow for Dbtful Accts

5,000 5,000 5,000 5,000

SCF

BS

IS

11/21 Cash Acct Receivable: NS

Collection of previously written-off account Increases cash flow, operations Has no effect on balance sheet Has no effect on income statement
21

LG 4

ESTIMATING ESTIMATING UNCOLLECTIBLES UNCOLLECTIBLES

2 methods to estimate uncollectibles 2 methods to estimate uncollectibles
Method #1 Method #1
Based on % of sales Based on % of sales

Method #2 Method #2
Based on analyzing receivables Based on analyzing receivables

22

LG 4

PERCENT OF SALES:
Method #1

Bad debt expense is estimated by taking a percentage of period sales.

23

LG 4

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

24

LG 4

EXERCISE 8-9a EXERCISE 8-9a

At the end of the current year, accounts receivable had a debit balance of $775,000 and net sales is $6,000,000. Calculate the provision for uncollectibles if the allowance has a credit balance of $4,750 and Bad Debt Expense (BDE) is of 1% of net sales.

Click the button to skip this exercise

BDE = $15,000 Press Enter or click left mouse button for answer.
25

LG 4

EXERCISE 8-9c EXERCISE 8-9c

At the end of the current year, accounts receivable had a debit balance of $775,000 and net sales is $6,000,000. Calculate the provision for uncollectibles if the allowance has a debit balance of $5,050 and Bad Debt Expense (BDE) is of 1% of net sales.

Click the button to skip this exercise

BDE = $30,000 Press Enter or click left mouse button for answer.
26

LG 4

ANALYZING RECEIVABLES:
Method #2 Bad debt expense is estimated by taking a percentage of overdue accounts.

Allowance is adjusted to a credit balance equal to the bad debt expense estimate.
27

LG 4

EXHIBIT 2

28

LG 4

ADJUSTING ALLOWANCE: ADJUSTING ALLOWANCE:

Credit Balance Credit Balance

Allowance for Doubtful Accounts needs a balance of

$3,390
$3,390 - $510 = $2,880

29

LG 4

ENTRY 8/31: Adjustment #1

8/31 Bad Debt Expense Allowance for Doubtful Accounts

2,880 2,880

30

LG 4

What happens if the allowance for doubtful accounts has a debit balance? The company wrote off more accounts than it had estimated.
31

LG 4

EXHIBIT 2

32

LG 4

ADJUSTING ALLOWANCE: ADJUSTING ALLOWANCE:

Debit Balance Debit Balance

Allowance for Doubtful Accounts needs a balance of

$3,390
$3,390 + 300 = $3,690
33

LG 4

ENTRY 8/31: Adjustment #2

8/31 Bad Debt Expense Allowance for Doubtful Accounts 3,690 3,690

34

LG 4

EXERCISE 8-9b EXERCISE 8-9b

At the end of the current year, accounts receivable had a debit balance of $775,000 and net sales is $6,000,000. Calculate the provision for uncollectibles if the allowance has a credit balance of $3,750 and aging of A/R indicates doubtful accounts = $18,350. BDE = $14,600 Press Enter or click left mouse button for answer.
Click the button to skip this exercise.

35

LG 4

EXERCISE 8-9d EXERCISE 8-9d

At the end of the current year, accounts receivable had a debit balance of $775,000 and net sales is $6,000,000. Calculate the provision for uncollectibles if the allowance has a debit balance of $5,050 and aging of A/R indicates doubtful accounts = $31,400. BDE = $36,450 Press Enter or click left mouse button for answer.
Click the button to skip this exercise.

36

LG 4

COMPARING ESTIMATING METHODS

37

LEARNING GOALS LEARNING GOALS

Compare direct write-off to allowance methods.

38

LG 5

COMPARING WRITE-OFF METHODS

39

LEARNING GOALS LEARNING GOALS

Describe nature, characteristics, accounting for notes receivable.

40

LG 6

What is a note receivable?

A note receivable is a written promise to pay money at definite time.

41

LG 6

NOTES RECEIVABLE NOTES RECEIVABLE

Have a maturity date Have a maturity date
Due date for payment Due date for payment

Pay interest Pay interest Interest = Principal * Rate * Time Interest = Principal * Rate * Time Time is expressed as part of year Time is expressed as part of year

42

LG 6

EXAMPLE EXAMPLE
A company accepted a 12%, 30-day note A company accepted a 12%, 30-day note receivable with a principal amount of receivable with a principal amount of $6,000. $6,000. Interest due is Interest due is $6,000 * .12 * 1/12 $6,000 * .12 * 1/12 Interest due is $60 Interest due is $60
43

LG 6

How would the note receivable and its collection affect financial statements?
Click the button to skip journal entries

44

LG 6

ENTRY 11/21: Accepting Note

Receivable
SCF BS IS

11/21 Note Receivable: WAB Co

6,000

Acct Receivable: WAB Co 6,000

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
45

LG 6

ENTRY 12/21: Collecting Note

Receivable
SCF BS IS R

12/21 Cash Note Receivable: WAB Co Interest Revenue

6,060 6,000 60

Collecting a note receivable Increases cash flow, operations Has net increase on assets, equity on balance sheet Increases revenue on income statement
46

LEARNING GOALS LEARNING GOALS

Describe reporting for receivables on balance sheet.

47

LG 7

REPORTING RECEIVABLES 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

48

LEARNING GOALS LEARNING GOALS

Describe principles for managing accounts receivable.

49

LG 8

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

50

LEARNING GOALS LEARNING GOALS

Compute, interpret accounts receivable turnover, number days sales in receivables.

51

LG 9

ACCOUNTS RECEIVABLE ACCOUNTS RECEIVABLE TURNOVER TURNOVER

Accounts receivable turnover measures how Accounts receivable turnover measures how frequently accounts receivable are collected frequently accounts receivable are collected A/R Turnover = A/R Turnover = Net Sales/ Ave. Accounts Receivable Net Sales/ Ave. Accounts Receivable
Average Accts Rec = (beginning AR + ending AR)/2
52

LG 9

STARBUCKS TURNOVER STARBUCKS TURNOVER

2004 Net Sales Net A/R 2003 2002 $5,294.2 $4,075.5 -----140.2 114.4 $97.6

2004 A/R turnover = $5,294.2/{(140.2 + 114.4)/2} = 41.6

53

LG 9

What is Starbucks accounts receivable turnover for 2003?

2003 A/R turnover = $4,075.5 /{(114.4 + 97.6)/2} = 38.5

54

LG 8

ANALYSIS: Turnover ANALYSIS: Turnover

Trend for accounts receivable Trend for accounts receivable turnover: turnover: Starbucks improved its accounts Starbucks improved its accounts receivable turnover in 2004. receivable turnover in 2004.

55

LG 9

DAYS IN SALES 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

Average Daily Sales = Net Sales / 365 days in a year
56

LG 9

STARBUCKS DAYS IN STARBUCKS DAYS IN SALES SALES

Starbucks average days in sales for 2004 is Starbucks average days in sales for 2004 is ($127.3/ 14.5) = ($127.3/ 14.5) = 8.8 8.8

57

LG 9

What is Starbucks days in sales for 2003?

Starbucks average days in sales for 2003 is ($106/ 11.2) = 9.5

58

LG 8

ANALYSIS: Days in Sales ANALYSIS: Days in Sales

Starbucks collected its accounts Starbucks collected its accounts receivable almost 1 day faster in receivable almost 1 day faster in 2004 than in 2003. 2004 than in 2003.

59

CHAPTER 8

THE END

60