Ch8 - Reporting and Analyzing Receivables

At what value are accounts receivable reported on the balance sheet?

Cash realizable value

At the beginning of the year, a company had accounts receivable of $700,000 and an allowance for doubtful accounts with a credit balance of $60,000. During the current year, sales on account were $195,000 and collections on account were $110,000. Also during the current year, the company wrote off $10,000 in uncollectible accounts. At year-end, an analysis of outstanding accounts receivable indicated that the allowance for doubtful accounts should have a $32,000 credit balance so the company records the appropriate year-end adjusting entry. How much did the cash realizable value change during the current year?

$103,000 increase

The following information is related to beginning of the year balances. Accounts receivable, $700,000 Allowance for doubtful accounts (credit balance), $60,000 During the current year, sales on account were $195,000 and collections from customer were $115,000. Also during the current year, the company wrote off $11,000 in uncollectible accounts. At year-end, the company's credit manager estimates that $72,000 of the outstanding accounts receivable will prove uncollectible. Bad debt expense for the current year is:

$23,000

An analysis and aging of the accounts receivable of a certain company at December 31 reveal the following data before year-end adjusting entries: Accounts receivable $800,000 Allowance for doubtful accounts (credit) $12,000 Amounts expected to become uncollectible $65,000 How much is the cash realizable value of the accounts receivable at December 31, after adjusting entries?

$735,000 {800,000-65,000= 735,000}

At the start of the year, a company's Allowance for Doubtful Accounts had a debit balance of $22,000. During the year, it had credit sales of $1,100,000. It also wrote-off $50,000 of uncollectible accounts receivable during the year. Past experience indicates that the allowance should be 2% of the balance in receivables. If the accounts receivable balance at December 31 was $250,000, what is the bad debt expense for the year?

$77,000

Net Realizable Value

(aka Cash Realizable Value) Accounts Receivable - Allowance for Doubtful Accounts (what's expected to collect; Increase: sales on account Decrease: when the company collects payments from customers)

Five Steps of Managing Receivables

1. Determine to whom to extend credit 2. Establish a payment period 3. Monitor collections 4. Evaluate the liquidity of receivables (ratios) 5. Accelerate cash receipts from receivables when necessary

Average Collection Period

365 [or 366 on a leap year] / Accounts Receivable Turnover 365 / (Net Credit Sales / Average Accounts Receivable) A high value suggests difficulty collecting cash from customers. Most companies want to collect their accounts receivable within 30 days.

Notes Receivalbe

A formal, written promise signed by the debtor and issued to the creditor. The note states the amount due and a due date (maturity date) which usually carries an annual interest rate (Note receivables are trade receivables if they result from sales transactions)

Which statement is true about reporting receivables on the balance sheet?

Allowance for Doubtful Accounts is shown as a deduction from Accounts Receivable on the balance sheet.

Accounts Receivable

Amounts customers owe as a result from the sale of goods/services arising from selling it on credit which rarely has interest rates (almost always trade receivables)

Writing-off a specific customer's accounts receivable under the allowance method --------------------------- A) must occur before the last day of the accounting period B) does not affect the balance of Cash C) increases bad debt expense for the accounting period D) does not affect the balance of the Allowance for Doubtful Accounts E) decreases the cash realizable value of accounts receivable

B) does not affect the balance of Cash.

The balance of Allowance for Doubtful Accounts prior to recording the end of year adjusting entry to record Bad Debt Expense ---------------------------- A) is relevant when using the direct write-off method. B) equals the Bad Debt Expense to be recorded as a year-end adjusting entry. C) is relevant when using the percentage-of-receivables basis. D) will never show a debit balance at this stage in the accounting cycle. E) equals the Bad Debt Expense to be recorded on the income statement.

C) is relevant when using the percentage-of-receivables basis.

What is often the most critical part of managing receivables? ---------------------------- A) Establishing a payment period B) Monitoring the receivables C) Determining which method to use to account for bad debts D) Determining who gets credit and who does not get credit E) Evaluating the liquidity of outstanding receivables

D) Determining who gets credit and who does not get credit

Aging of Accounts Receivable

Estimates the year-end allowance for doubtful accounts as a percentage of outstanding accounts receivable. The longer a receivable has been outstanding the more likely it will never be collected.

A 120-day note dated March 5, would mature on

July 3

Accounts Receivable Turnover

Net Credit Sales*** / Average Accounts Receivable ***can use net sales (High accounts receivable turnovers are usually better for the company since it suggests the company has little trouble collecting accounts receivable from its customers)

Interest

Principal x Interest Rate x Time (Time: Years, Months [x/12], Days [x/360] & Interest RECEIVABLE (from prior entry) Interest REVENUE (at the end/maturity) )

Trade Receivables

Receivables arising from sales transactions with customers

Direct Write-Off Method

The revenue from the sale to the customer & its bad debt expense could be in two different accounting periods (will "directly write-off" the bad debt expense at that very moment- debit: Bad Debt Expense credit: Accounts Receivable)

Other Receivables

interest receivable, loans to company officers, advances to employees, & income taxes refundable

Allowance Method

reports a contra asset - "Allowance for Doubtful Accounts" for the amount of outstanding accounts receivable it estimates are uncollectible WHICH can be estimated using the "percentage-of-receivable method." It computes uncollectible accounts receivable as a percentage of outstanding accounts at the end of the period. (Normally- debit: Allowance for Doubtful Accounts credit: Accounts Receivable Year End- debit: Bad Debt Expense credit: Allowance for Doubtful Accounts)

Factoring

selling receivables to a third party (Factor) at a discount from its face value (typically 2-5%) (debit: cash debit: service charge expense credit: account receivable)