Finance ex 2
Average Collection Period
365/accounts receivable turnover
the formula for average collection period
365/accounts receivable turnover
allowance method
A method of accounting for bad debts that involves estimating uncollectible accounts at the end of each period.
Accounts Receivable
Amount owed to a company by its customers from the sale of products or services on account
How to record bad debt/uncollectible accounts
1)reduce assets (A/R) by estimate we don't expect to collect 2) increase expense (bad debt exp) to reflect cost of offering credit to customers. The bad debt expense will DECREASE net income
Accounts Receivable is an.... A. Liability B. Asset
Asset
aging method
Basing the estimate of future bad debts on the various ages of individual accounts receivable, using a higher percentage for "old" accounts than for "new" accounts
Credit sales are recorded as
Debit Accounts Receivable, credit Service Revenue
for internal record keeping, most companies carry inventory using
FIFO
allowance method is required by
GAAP
net credit sales
Gross Credit Sales - Sales Discounts - Sales Returns and Allowances discounts, allowances, returns
bank reconciliation
Helps maintain control of cash accounts
We report allowances for uncollectible accnts in asset section of the balance sheet BUT
It represents a reduction in the balance of accounts receivables
recievables turnover ratio
Net Credit Sales / Average Accounts Recievable
Allowance Account
Reduces accounts receivable indirectly usually a credit balance
Collection Period
The number of days between the time of service and the time of payment
Credit Sales
Transfer of products and services to a customer today while bearing the risk of collecting payment from that customer in the future. Also known as sales on account or services on account.
Nonoperating activities
Various revenues, expenses, gains, and losses that are unrelated to a company's main line of operations.
trade discount
a % reduction in the list price granted to customers
Merchandising Company
a company that resells tangible products previously bought from suppliers
Net Revenue
a company's total revenues less any discounts, returns, and allowances Net sales (aka)
inventory
a complete list of items such as property, goods in stock, or the contents of a building.
FIFO method
a process costing method in which equivalent units and unit costs relate only to work done during the current period
uncollectible accounts
accounts receivable that cannot be collected Aka: bad debts
average accounts receivable balance is calculated by
adding last yrs and this yrs ending balances of A/R and dividing the sum by 12
more accurate accounting method?
aging of A/R
allowance method
allowing for the possibility that some accounts will be uncollectible at some point in the future
Managing Receivables
average collection & receivable turnover ratio
in a perpetual inventory system the inventory account is
continually adjusted
allowance for uncollectible accounts
contra asset account representing the amount of accounts receivable that we do not expect to collect
Inventory Turnover Ratio
cost of goods sold/average inventory
formula for inventory turnover
cost of goods sold/average inventory
Accounts Receivable should be classified as
current asset
normal balance of notes receivable
debit
Joyce Corp. uses the percentage-of-credit-sales method to account for bad debt expense. Joyce determines that a customer account of $20,000 should be written off as uncollectible. The write off of the account will include which of the following entries?
debit to allowance for uncollectible accounts credit to A/R
Costs related to manufacturing products typically include
direct labor, overhead, raw material
Where is a note receivable reported in the balance sheet?
either current or concurrent assets
financial statement of recording an allowance for estimated sales returns are
equity, assets, & net income ALL DECREASE
Bad Debt Expense
expense associated with estimated uncollectible accounts expense... amount not collected Cost of est future bad debts
calculate interest on a note
face val x annual int rate x fraction of annual period
bad debt is recorded on
income statement
net credit sales is recorded on the
income statement
Debit balance before adjustment
indicates that the estimate at the beginning of the year was too low
total revenues less discounts, returns, & allowances referred to as
net revenue
trade receivables
notes and accounts receivable that result from sales transactions
disadvantage of extending credits to customers?
requires higher investment in receivables increased bed debt
net realizable value
the amount of cash the firm expects to collect
Receivable Turnover Ratio indicates
the number of times during a year that the average A/R were collected
when are A/R current asset?
they'll be converted to cash w/in 1 year