1. ACCOUNTING FOR RECEIVABLES Monday, Dec 1 will be Unit 3 Test (covering chapter 7 and 8) CHAPTER 8

2. BALANCE SHEET PRESENTATION OF RECEIVABLES Each of the major types of receivables should be identified in the balance sheet. In the balance sheet, short-term receivables (such as AR and NR) are reported within the current assets section below cash and temporary investments. Both the gross amount of receivables and the allowance for doubtful accounts should be reported.

3. BALANCE SHEET PRESENTATION OF RECEIVABLES RIM Balance Sheet Feb 29, 2008 Current Assets Cash90,000 Notes Receivable 45,000 Accounts Receivable 600,000 Less: Allowance for DA 35,000565,000 HST Recoverable 25,000 Merchandise Inventory365,000 Supplies 10,000 Total Current Asset $1,100,000

4. BALANCE SHEET PRESENTATION OF RECEIVABLES NR is listed before AR because it is more easily converted to cash. If a company has a significant risk of uncollectible accounts or other problems with receivables, it is required to disclose this possibility in the notes (or disclosure note) to the financial statements. Bad debt expense is reported in operating section of the Income Statement.

5. Ratio Anaysis Compared to 2012, we see big increase in AR amount in 2013 Balance sheet. Is this positive or negative for the company? Sales changed from 1.5M (2012) to 3M (2013) and the AR changed from 1M to 2M. Is this positive? Sales stayed the same, (1.5M) but only AR increased from 1M to 2M. Is this positive? Unusually high increase in AR amount might signal trouble. (assuming that sales stayed the same) Perhaps, the company increased its sales by loosening its credit policy, and these receivables may be difficult or impossible to collect.

6. ACCOUNTS RECEIVABLE TURNOVER RATIO The ratio used to assess the liquidity of the receivables is the receivables turnover ratio. This ratio measures the number of times, on average, that receivables are collected during the period. Unfortunatelly, companies rarely report the amount of net sales made on credit in their financial statements. NCS = Sales – Cash sales ANR = (BB + EB) / 2 Net Credit Average Net Receivables Sales Receivables Turnover  =

7. ACCOUNTS RECEIVABLE TURNOVER RATIO As a result, net sales (which includes both cash and credit sales) is used as a substitute for Net Credit Sales number in the formula. In addition, some companies do not report gross accounts receivable, so net accounts receivable can be used instead. As long as we use same numerator and denominator for this ratio (year over year or company over company), we can use this ratio. Let’s do BE8.15 (P436) together.

8. ACCOUNTS RECEIVABLE TURNOVER RATIO Let’s do BE8.15 (P436) together. 23.96 times (or 24 times) indicates that they collected AR 24 times a year. If the term they allow for AR is 2,10, net 30 then you can safely assume that AR Collection employees are doing a decent job. Only when you compare this number either year over year or with competitor’s AR Turnover ratio then we can see that AR collection employees are doing a good job or bad job.

9. COLLECTION PERIOD The collection period (in days) is a variant of the receivables turnover ratio and makes liquidity even more evident. The general rule is that the collection period should not exceed the credit term period. (such as 30 days) Days in Year Receivables Collection (365) Turnover Period in Days  =

10. Collection Period From previous example, the collection period = 365 days / 23.96 times = 15.2 days It takes them 15.2 days to collect their AR which is shorter than their 30 days credit policy. AR collection employees are doing a decent job. Both receivables turnover and collection period are useful for judging how efficiently a company converts its credit sales to cash. These measures should be compared to industry average number and to previous year’s number.

11. Classwork / Homework P439 E8.10, E8.11 P444 P8.10, P8.11