Chapter 8: Reporting and Analyzing Receivables

Managing Receivables involves 5 steps:

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

Occasionally, a company collects from a customer after the account has been written off as uncollectible. The company must make 2 entries to record the recovery of a bad debt:

1. It reverses the entry made in writing off the account. This reinstates the customer's account Debit to Accounts Receivable and a credit to Allowance for Doubtful Accounts. 2. It journalizes the collection in the usual manner. Debit to Cash and a credit to Accounts Receivable.

Define percentage-of-receivables basis:

A percentage relationship between the amount of receivables and expected losses from uncollectible accounts

The seller may offer terms that encourage early payment by providing a ________.

Discount

Some retailers issue their own credit cards. When you use a retailer's credit card (JCPenney, Macy's, etc.) the retailer charges _______ on the account balance due if not paid within a specific period.

Interest

What are some steps that customers can take to minimize losses due to bad debts while relaxing credit standards?

Might require risky customers to provide letters of credit or bank guarantees, if customer does not pay the bank that provided the guarantee will do so.

Two accounting issues associated with accounts receivable are:

Recognizing accounts receivable and valuing accounts receivable

Valuing short-term notes receivable is the same as...

Valuing accounts receivable

Allowance Method

a method that involves estimating uncollectible accounts at the end of each period

Concentration of credit risk

a threat of nonpayment from a single large customer or class of customers that could adversely affect the financial health of the company

Accounts Receivable

amounts customers owe

Under the _______, bad debt expense will show only ______ from uncollectible. The company reports accounts receivable at its gross amount ______ any adjustments for estimated losses for bad debts.

direct write-off method; actual losses; without

Under the _____, companies often record bad debt expenses in a period ______ from the period in which they recorded the revenue. Unless a company expects bad debt losses to be insignificant, the direct write-off method is _____ acceptable for financial reporting purposes.

direct write-off method; different; not

other receivables

interest receivable and tax refunds

Aging the accounts receivable

the schedule classifies customer balances by the length of time they have been unpaid

To prevent premature or _____________ write-offs, authorized management personnel should formally approve each write-off. To maintain ______, the employee authorized to write off accounts should not have daily responsibilities related to ash or receivables.

unauthorized; segregation of duties

Notes Receivable

written promise for amount to be received

Give the basic formula for computing interest:

(Face Value of Note) x (Annual Interest Rate) x (Time in Terms of One year)

What are some other uses of the accounts receivable aging schedule?

-Helps managers estimate the timing of future cash in flows -Provides information about the overall collection experience of the company and identifies problem accounts

3 essential features for the allowance method for financial reporting when bad debts are material in amount:

1. Companies estimate uncollectible accounts receivable and match them against revenues in the same accounting period in which the revenues are recorded. 2. Companies record estimated uncollectible as an increase (debit) to Bad Debt Expense and an increase (credit) to Allowance for Doubtful accounts through an adjusting entry at the end of each period. Allowance for Doubtful Accounts is a contra account to Accounts Receivable.. 3. Companies debit actual uncollectible to Allowance for Doubtful Accounts and credit them to Account Receivable at the time the specific account is written off as uncollectible.

The maturity date of a promissory note may be stated in one of three ways:

1. On demand 2. On a stated date 3. At the end of a stated period of time

Who are the 3 parties involved when national credit cards (Visa or MasterCard) are used in making retail sales?

1. the credit card issuer 2. the retailer 3. the customer

What is a dishonored (defaulted note)? What should the lender do if collection is eventually expected? What if there is no hope of collection?

A dishonored (defaulted) note is a note that is not paid in full at maturity. If the leader expects that it eventually will be able to collect, the two parties negotiate new terms to make it easier for the borrower to repay the debt. If there is no hope of collection, the payee should write off the face value of the rate.

When a merchandiser sells goods, it increases (debits) ________ and increases (credits) _______.

Accounts Receivable; Sales Revenue

Under the allowance method, a company debits EVERY bad debt write-ff to the ________ and NOT to Bad Debt Expense.

Allowance account

What does Allowance for Doubtful Accounts show? Why don't companies just credit Accounts Receivable instead?

Allowance for Doubtful Accounts shows the estimated amount of claims on customers that companies expect will become uncollectible in the future. Companies use a contra account instead of a direct credit to Accounts Receivable because they do not know which customers will not pay.

The retailer considers sales resulting from the use of Visa or MasterCard as ______ sales.

Cash

When the due date is stated in terms of days, you need to:

Count the exact number of days, omitting the date the note is issued, to determine the maturity date

Is Allowance for Doubtful Accounts closed at the end of the fiscal year?

No, companies DO NOT close Allowance for Doubtful Accounts at the end of the fiscal year.

The buyer might find some of the goods unacceptable and choose to _______ the unwanted goods. Sales returns also reduce receivables..

Return

The company records the note receivable at its face value, the value shown on the face of the note. No interest revenue is reported yet. Why?

The revenue recognition principle does not recognize revenue until the performance obligation is satisfied. (Interest is earned (accrued) as time passes)

Occasionally, the allowance account will have a debit balance prior to adjustment. Why would this occur? What would the company do during the adjusting entry?

This occurs because the debits to the allowance account from write-offs during the year exceeded the beginning balance in the account which was based on previous estimates for bad debts. In such a case, the company adds the debit balance to the required balance when it makes the adjusting entry.

When is a note honored?

When its makers pays in full at its maturity

Promissory Note

a written promise to pay a specified amount of money on demand or at a definite time

A retailer's _________ of a national credit card is another form of selling-factoring- the receivable by the retailer.

acceptance

A service organization records a receivable when it performs services on ______

account

Total estimated uncollectible accounts, as determined in the aging schedule represents the required balance in Allowance for Doubtful Accounts at the balance sheet date. The amount of bad debt expense that should be recorded in the ___________ is the difference between the required balance and the existing balance in the allowance account.

adjusting entry

To more accurately estimate the ending balance in the allowance account, a company often prepares a schedule, called _________.

again the accounts receivable

Companies use the average collection period to...

assess the effectiveness of a company's credit and collection policies.

Companies report accounts receivable on the _________ as an asset.

balance sheet

Note that the recovery of a bad debt, like the write-off of a bad debt, affects only ________ accounts.

balance sheet

The _________ provides better ________ of expenses with revenues on the income statement.. It also ensures that receivables are states at their cash __________ on the balance sheet

cash (net) realizable value

The accounts receivable turnover ratio measures the number of times, on average, a company....

collects receivables during the period

Companies that extend credit should determine a required payment period and _____ that policy to their customers. It is also important that the payment period is consistent with that of _____.

communicate; competitors

If a company has significant concentrations of ______ risk, it must discuss this risk in the notes to its financial statements.

credit

Many companies _____ by being generous with their credit policy. However, they sometimes tend credit to ______ customers who do not pay.

increase sales; risky

Negotiable instruments

instruments, that when sold, the seller can transfer them to another party by endorsement

The longer a receivable is past due, the ______ likely it is to be collected.

less

Receivables are important because they represent one of a company's most _______ assets.

liquid

Bad Debt Expense

losses that result from extending credit

Companies must use the allowance method for financial reporting purposes when bad debts are ______ in amount.

material

Companies should prepare an accounts receivable aging schedule at least _____.

monthly

Promissory notes are _________. (like checks)

negotiable instruments

Companies should identify in the balance sheet or in the _____ to the financial statements each of the major types of receivables.

notes

Companies report Bad Debt Expense in the income statement as an ________.

operating expense

For each interest-bearing note, the amount due at maturity is the face value of the note __________ for the length of time specified on the note.

plus interest

Trade Receivables

receivables resulting from business sales transactions

Estimated uncollected receivables therefore ______ receivables on the balance sheet.

reduce

Receivables

refers to amounts due from individuals and companies; claims that are expected to be collected in cash

A merchandiser records accounts receivable at the point of _______ of merchandise on account.

sale

Notes receivable give the holder a ________ to assets than do accounts receivable

stronge3r legal claim

Average Collection Period

the average amount of time that a receivable is outstanding, calculated by dividing 365 days by the accounts receivable turnover.

Accounting uses two methods for uncollectible accounts:

the direct write-off method and the allowance method

Cash (net) realizable value

the net amount a company expects to receive in cash from receivables

Maker

the party making the promise to pay

Payee

the party to whom payment is to be made

Accounts Receivable Turnover

the ratio that analysts use to assess the liquidity of receivables (net credit sales/average net accounts receivable)

What are some of the major advantages of credit cards to the retailer?

the use of national credit cards translates to more sales and zero bad debts for the retailers

Determining the amount to report is sometimes difficult because some receivables will become _______.

uncollectible

Direct write-off method

when a company determines receivables from a particular company to be uncollectible, it charges the loss to Bad Debt Expense