ACC 131 chapter 5
principal
amount borrowed
accounts receivable
does not have a formal note
for the buyer
it is a reduction to the cost of the goods and services
one of the most widely used asset management ratios is
accounts receivable turnover
sales revenue is such a key component of a company's success
analysts are interested in a large number of ratios that incorporate sales
the factor the buyer of the receivables acquires the right to
collect the receivables and the risk of not being able to collect
the issuer of the credit card pays the seller the amount of each sale less a service charge on the date of purchase and then
collects the full amount of the sale from the buyer at some later date
3 changes to sales revenue includes
discounts returns and allowances
allowance for doubtful accounts
established for the estimate of potentially uncollectible accounts
interest
excess of the total amount of money collected over the amount borrowed
increasingly common practice is to
factor or sell receivables
net sales = total credit sales - sales discounts - sales returns and allowance (T/F)
false
the longer a customer's account balance remains outstanding the greater the likelihood that it will be collected in the near future (T/F)
false
under the allowance method of accounting for bad debts the company estimates the amount of bad debts before those debts actually occur (T/F)
false
appropriate amount of revenue to recognize is
generally the cash received or the cash equivalent of the receivable
gross profit margin calculation
gross profit margin = gross profit / net sales
3 common profitability ratios
gross profit margin, operating margin, and net profit margin
asset management
how efficiently a company is using the resources at its disposal
interest calculation
interest = principal x annual interest rate x fraction of one year
period of a note or the time value of money
interest can be considered compensation paid to the lender for giving up the use of resources
securitization occurs when
large businesses and financial institutions frequently package factored receivables as financial instruments or securities and sell them to investors
profitability ratios attempt to
measure the return the company is earning on sales
net profit margin calculation
net profit margin = net income / net sales
GAAP requires accounts receivable to be shown at their
net realizable value which is the amount of cash the company expects to collect
in a typical factoring arrangement the sellers of the receivables have
no continuing responsibility for their collection
notes receivable
note is a legal document given by a borrower to a lender stating the timing of repayment and the amount to be repaid
sales allowance
offered by seller if the goods or services are unsatisfactory to the customer or if the product arrives late
accrual basis accounting recognizes revenue when it is
realized which means non-cash resources or inventory have been exchanged for cash or near cash and earned which means earnings process is substantially complete
notes receivable
receivables that generally specify an interest rate and a maturity date at which an interest and principal must be repaid
a trade discount
reduction in the selling price granted by the seller to a particular class of customers
contra revenue
sales return and allowances used to record the price reduction
merchandise or goods returned by the customer to the seller are
sales returns and are also recorded in the sales returns and allowances account
which documents are prepared based on the order document
shipping and billing
for the seller
the cash is more quickly available and collected costs are reduced
2 methods to record bad debt expense
the direct write off method and the allowance method
a debit card authorizes a bank to make an immediate electronic withdrawal from
the holder's bank account (debit)
at the end of each accounting period
the individual accounts receivable are categorized by age
why do analysts like to look at the operating margin and net profit margin percentages
to see how much is left from a sales dollar after paying for the product and all its operations
estimated bad debt expense equals
total credit sales x percentage of credit sales estimated to default
debit cards are disadvantageous to the card holder since
transactions cannot be rescinded by stopping payment
a primary advantage of the allowance method to account for bad debts is that it supports the matching principle (T/F)
true
accounts receivable are shown on the balance sheet at their net realizable value (T/F)
true
because the allowance method results in better matching accounting standards require its use rather than the direct write-off method unless bad debts are immaterial (T/F)
true
for sales revenues internal controls involved the following
accounting for a sale begins with the receipt of purchase order or some similar document is necessary for the buyer to be obligated to accept or pay for the ordered goods
accounts receivable turnover calculation
accounts receivable turnover = net sales / average net accounts receivable
allowance method
bad debt expense is recorded in the period of sale which allows it to be properly matched with revenues according to the matching concept
special form of factoring
bank credit cards such as visa and master card
invoices
billing documents
current and noncurrent receivables
both accounts and notes receivable can be classified as current, most accounts receivables are due within one year but notes receivable can be both, and if it is due beyond one year it will be classified as noncurrent
operating margin calculation
operating margin = operating income / net sale
a sale and its associated receivable are recorded only when the
order, shipping, and billing documents are all present
2 methods commonly used to estimate bad debt expenses are
percentage of credit sales method and the aging method
when receivables are factored the seller
receives an immediate cash payment reduced by the factor's fees
debit cards are advantageous to bank and merchants through
reduced transaction processing costs
quantity discount
reduction in the selling price granted by the seller because selling costs per unit are less when larger quantities are ordered
encourage promp payment businesses may offer a sales discount
reduction of the normal selling price and is attractive to both the seller and the buyer
bad debt expense
when customers do not pay their accounts recivable