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