1 LO5 Describe accounting for receivables and uncollectible amounts. LO6Explain how returns and discounts are accounted for. LO7Account for long-term receivables.

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Presentation transcript:

1 LO5 Describe accounting for receivables and uncollectible amounts. LO6Explain how returns and discounts are accounted for. LO7Account for long-term receivables including when there is no interest specified. LO8Understand how managers can use accounting estimates to create hidden reserves to manage earnings. LO9Use information about accounts receivable to analyze and interpret financial statements. Learning objectives Copyright © 2013 McGraw-Hill Ryerson Limited

2 Current and Quick Ratios Current and Quick ratios examine the liquidity of an entity. 1.Current Ratio = CA / CL 2.Quick Ratio = Quick Assets / CL Quick assets are cash or can be realized in cash fairly quickly. Copyright © 2013 McGraw-Hill Ryerson Limited LO9

3 Accounts Receivable Turnover Ratio Accounts receivable turnover ratio assesses liquidity and how well credit is managed AR Turnover Ratio = Credit Sales / Avg. AR Receivables turnover – number of times in a period receivables are incurred and collected How quickly the entity collects receivables Copyright © 2013 McGraw-Hill Ryerson Limited LO9

4 Average Collection Period The number of days, on average, it takes to collect receivables Average Collection Period = 365 / AR Turnover Ratio Use credit sales to determine effect Focus only on true “trade” receivables Use average receivable balance Compare to credit policies of firm Copyright © 2013 McGraw-Hill Ryerson Limited LO9

5 Analyzing Accounts Receivable Problems with collection: ▫Aging schedule ▫Changes in allowance for doubtful accounts Accounts receivable may fluctuate, but should remain a constant proportion of sales Copyright © 2013 McGraw-Hill Ryerson Limited LO9