Recognizing Notes Receivable Definition - A written promise to pay a specified amount of money on demand or at a definite time If note is received to settle an outstanding account receivable: Notes are valued at net realizable value – Similar process to determine bad debt expense and allowance as for accounts receivable

Recording Interest Formula for calculating interest: – An annual rate of interest - to determine monthly interest, divide by twelve Separate interest receivable account is used (value of note is not altered) Example: $10,000 note at 6% due in 4 months Principal Principal of Note X X = Annual AnnualInterestRate Time in Time in Terms of One Year Interest

Disposing of Notes Receivable A note is honoured when paid in full on its maturity date In our example, the $10,000 note is paid on time. We need to record the principle and interest portions paid. We have accrued part of the interest already.

Disposing of Notes Receivable - 2 A note is dishonoured if not paid in full at maturity If collection is expected we debit the accounts receivable account

Accelerating Cash from Receivables Loans – using the receivables as collateral Sale of receivables – sold to other companies who specialize in collections Factoring – sold to other company which collects cash – if the company is still responsible it is sold with recourse Can also securitize your receivables – similar to sale, just usually better quality receivables, which gives you more cash for them

Management of Receivables Receivables turnover ratio: = Net Credit Sales ÷ Average Receivables – Sometimes we don’t know credit sales, so we use total sales instead – Measures the number of times that receivables are collected in a period – Higher the number, the more liquid are receivables Collection period: = 365 ÷ Receivables Turnover Ratio – Calculates the average number of days that accounts receivable are outstanding Operating Cycle: = Days Sales in Inventory + Collection Period – Calculates the number of days to complete the operating cycle Purchase of inventory through collection of cash

Example P.426 – RIM’s Financial Statements for presentation Let’s Do BYP8-2 together

Class Work BE8-10,12,14,15

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