1 PowerPointPresentation by PowerPoint Presentation by © Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star Logo, and South-Western are trademarks used herein under license. FINANCIAL ACCOUNTING 2 ND EDITION BY DUCHAC, REEVE, & WARREN 8 Receivables

2 LEARNING GOALS When you finish this chapter, you should be able to

3 1.Describe common classifications of receivables. 2.Describe nature, accounting for uncollectible receivables. 3.Describe direct write-off method to account for uncollectible receivables. LEARNING GOALS Continued

4 LEARNING GOALS 4.Describe allowance method to account for uncollectible receivables. 5.Compare direct write-off vs. allowance methods to account for uncollectible receivables. 6.Describe nature, characteristics, accounting for notes receivable. Continued

5 LEARNING GOALS 7.Describe reporting for receivables on balance sheet. 8.Describe principles for managing accounts receivable. 9.Compute, interpret accounts receivable turnover, number days sales in receivables.

6 STARBUCKS CORPORATION Starbucks Corporation  Invoices local businesses for coffee service on-premises  Payment due after delivery  Trust allows businesses with good history to use trade credit

7 LEARNING GOALS 1 Describe common classifications of receivables.

8 LG 1 Why do companies sell on credit? Offering credit allows companies to sell more product.

9 CLASSIFYING RECEIVABLES Accounts receivable –Short term credit –30 – 60 days Notes receivable –Longer term –May be 1 year or more Other receivables Accounts receivable –Short term credit –30 – 60 days Notes receivable –Longer term –May be 1 year or more Other receivables LG 1

10 LEARNING GOALS 2 Describe nature, accounting for uncollectible receivables.

11 LG 2 What happens if customers don’t pay the balance on their receivables? Companies must recognize an expense to write off accounts that are not collectible.

12 RECEIVABLES WRITE- OFFS 2 methods to acknowledge uncollectible accounts expense –Direct write-off (not allowed by GAAP) –Allowance method 2 methods to acknowledge uncollectible accounts expense –Direct write-off (not allowed by GAAP) –Allowance method LG 2

13 LEARNING GOALS 3 Describe direct write- off method to account for uncollectible receivables.

14 DIRECT WRITE-OFF Bad debt expense recorded when account determined to be worthless. LG 3

15 ALLOWANCE METHOD Bad debt expense estimated at end of accounting period. LG 4

16 How would estimating bad debt expense affect financial statements? LG 4 Click the button to skip this journal entry

17 ENTRY 12/31: Bad Debt Expense Estimate Estimating bad debt expense Has no effect on cash flows Decreases assets, equity on balance sheet Increases expense on income statement LG 4 12/31 Bad Debt Expense Allowance 40,000 SCFBSIS E

18 How would writing off an account under the allowance method affect financial statements? LG 4 Click the button to skip this journal entry

19 ENTRY 1/21: Write-off Writing off an account receivable Has no effect on cash flows Has no effect on total assets on balance sheet Has no effect on income statement LG 4 1/21 Allowance for Dbtfl Accts Acct Receivable: JP 6,000 SCFBSIS

20 LG 3 What happens if an account previously written off is subsequently collected? How would collection of written-off account affect financial statements? Click the button to skip this journal entry

21 ENTRY 6/10: Collection Collection of previously written-off account Increases cash flow, operations Has no effect on balance sheet Has no effect on income statement LG 4 5,000 SCFBSIS SCFBSIS 11/21 Acct Receivable: NS Allow for Dbtful Accts 11/21 Cash Acct Receivable: NS

22 ESTIMATING UNCOLLECTIBLES 2 methods to estimate uncollectibles –Method #1 Based on % of sales –Method #2 Based on analyzing receivables 2 methods to estimate uncollectibles –Method #1 Based on % of sales –Method #2 Based on analyzing receivables LG 4

23 PERCENT OF SALES: Method #1 Bad debt expense is estimated by taking a percentage of period sales. LG 4

24 LG 4 ExTone estimates that 1 1/2 % of 2008 credit sales ($3,000,000) will be uncollectible. $3,000,000 *.015 = $45,000

25 EXERCISE 8-9a At the end of the current year, accounts receivable had a debit balance of $775,000 and net sales is $6,000,000. Calculate the provision for uncollectibles if the allowance has a credit balance of $4,750 and Bad Debt Expense (BDE) is ¼ of 1% of net sales. Press “Enter” or click left mouse button for answer. BDE = $15,000 Click the button to skip this exercise LG 4

26 EXERCISE 8-9c At the end of the current year, accounts receivable had a debit balance of $775,000 and net sales is $6,000,000. Calculate the provision for uncollectibles if the allowance has a debit balance of $5,050 and Bad Debt Expense (BDE) is ½ of 1% of net sales. Press “Enter” or click left mouse button for answer. BDE = $30,000 Click the button to skip this exercise LG 4

27 ANALYZING RECEIVABLES: Method #2 Bad debt expense is estimated by taking a percentage of overdue accounts. LG 4 Allowance is adjusted to a credit balance equal to the bad debt expense estimate.

28 EXHIBIT 2 LG 4

29 ADJUSTING ALLOWANCE: Credit Balance Allowance for Doubtful Accounts needs a balance of $3,390 LG 4 $3,390 - $510 = $2,880

30 ENTRY 8/31: Adjustment #1 8/31 Bad Debt Expense 2,880 Allowance for Doubtful Accounts 2,880 LG 4

31 LG 4 What happens if the allowance for doubtful accounts has a debit balance? The company wrote off more accounts than it had estimated.

32 EXHIBIT 2 LG 4

33 ADJUSTING ALLOWANCE: Debit Balance Allowance for Doubtful Accounts needs a balance of $3,390 LG 4 $3, = $3,690

34 ENTRY 8/31: Adjustment # 2 8/31 Bad Debt Expense 3,690 Allowance for Doubtful Accounts 3,690 LG 4

35 EXERCISE 8-9b At the end of the current year, accounts receivable had a debit balance of $775,000 and net sales is $6,000,000. Calculate the provision for uncollectibles if the allowance has a credit balance of $3,750 and aging of A/R indicates doubtful accounts = $18,350. Press “Enter” or click left mouse button for answer. BDE = $14,600 Click the button to skip this exercise. LG 4

36 EXERCISE 8-9d At the end of the current year, accounts receivable had a debit balance of $775,000 and net sales is $6,000,000. Calculate the provision for uncollectibles if the allowance has a debit balance of $5,050 and aging of A/R indicates doubtful accounts = $31,400. Press “Enter” or click left mouse button for answer. BDE = $36,450 Click the button to skip this exercise. LG 4

37 COMPARING ESTIMATING METHODS LG 4

38 LEARNING GOALS 5 Compare direct write-off to allowance methods.

39 COMPARING WRITE-OFF METHODS LG 5

40 LEARNING GOALS 6 Describe nature, characteristics, accounting for notes receivable.

41 LG 6 What is a note receivable? A note receivable is a written promise to pay money at definite time.

42 NOTES RECEIVABLE Have a maturity date –Due date for payment Pay interest Interest = Principal * Rate * Time Time is expressed as part of year Have a maturity date –Due date for payment Pay interest Interest = Principal * Rate * Time Time is expressed as part of year LG 6

43 EXAMPLE A company accepted a 12%, 30-day note receivable with a principal amount of $6,000. Interest due is $6,000 *.12 * 1/12 Interest due is $60 A company accepted a 12%, 30-day note receivable with a principal amount of $6,000. Interest due is $6,000 *.12 * 1/12 Interest due is $60 LG 6

44 How would the note receivable and its collection affect financial statements? LG 6 Click the button to skip journal entries

45 6,000 ENTRY 11/21: Accepting Note Receivable Accepting a note receivable in payment of an account Has no effect on cash flows Has no net affect on balance sheet Has no effect on income statement LG 6 11/21 Note Receivable: WAB Co Acct Receivable: WAB Co SCFBSIS

46 ENTRY 12/21: Collecting Note Receivable Collecting a note receivable Increases cash flow, operations Has net increase on assets, equity on balance sheet Increases revenue on income statement LG 6 12/21 Cash Note Receivable: WAB Co Interest Revenue 6,060 6, SCFBSIS R

47 LEARNING GOALS 7 Describe reporting for receivables on balance sheet.

48 REPORTING RECEIVABLES Receivables expected to be collected within 1 year are classified as current assets Starbucks reports net accounts receivable of $140.2 million and Allowance for Doubtful Accounts of $2.2 million LG 7

49 LEARNING GOALS 8 Describe principles for managing accounts receivable.

50 LG 8 3 Steps for managing receivables are 1)Screening customers 2)Determining credit terms 3)Monitoring collections

51 LEARNING GOALS 9 Compute, interpret accounts receivable turnover, number days sales in receivables.

52 ACCOUNTS RECEIVABLE TURNOVER Accounts receivable turnover measures how frequently accounts receivable are collected A/R Turnover = Net Sales/ Ave. Accounts Receivable Accounts receivable turnover measures how frequently accounts receivable are collected A/R Turnover = Net Sales/ Ave. Accounts Receivable LG 9 Average Accts Rec = (beginning AR + ending AR)/2

53 STARBUCKS’ TURNOVER Net Sales$5,294.2$4, Net A/R $ A/R turnover = $5,294.2/{( )/2} = 41.6 LG 9

54 What is Starbucks’ accounts receivable turnover for 2003? LG A/R turnover = $4,075.5 /{( )/2} = 38.5

55 ANALYSIS: Turnover Trend for accounts receivable turnover: Starbucks improved its accounts receivable turnover in Trend for accounts receivable turnover: Starbucks improved its accounts receivable turnover in LG 8

56 DAYS IN SALES Days in sales estimates the length of time accounts receivable have been outstanding on average. Days in Sales = Ave. A/R / Ave. Daily Sales LG 9 Average Daily Sales = Net Sales / 365 days in a year

57 STARBUCKS DAYS IN SALES Starbucks’ average days in sales for 2004 is ($127.3/ 14.5) = 8.8 Starbucks’ average days in sales for 2004 is ($127.3/ 14.5) = 8.8 LG 9

58 What is Starbucks’ days in sales for 2003? LG 9 Starbucks’ average days in sales for 2003 is ($106/ 11.2) = 9.5

59 ANALYSIS: Days in Sales Starbucks collected its accounts receivable almost 1 day faster in 2004 than in LG 8

60 THE END CHAPTER 8