Receivables'''

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Chapter 8
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Receivables...

• Amounts due from individuals and companies-
  expected to be collected in cash.
• Frequently classified as
• Accounts receivable
• Notes receivable
• Other receivables

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Accounts Receivable...

• Amounts owed by customers on account.
• Result from the sale of goods/services.
• Expected to be collected within 30-60 days.
• Most significant type of claim held by company.
• Often called trade receivables.

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Illustration 8-9
Notes Receivable...

• Represent claims for which formal instruments
  of credit are issued as evidence of debt.

2001
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Other Receivables

• Nontrade including
• interest receivable
• loans to company officers
• advances to employees
• income taxes refundable

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Accounts Receivable...

• Are recorded when service is provided or at
  point of sale of merchandise on account.
• Accounts Receivable 100
• Sales 100

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Bad Debts
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2 Methods for Accounting for Uncollectible
Accounts

• The Direct Write-off Method
• The Allowance Method

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Direct Write-off Method

• Bad debt losses are not estimated.
• No allowance account is used.
• Accounts are written off when determined
  uncollectible as follows
• Bad Debts Expense 200
• Accounts Receivable--M. E. Doran 200

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Allowance Method

• Uncollectible accounts receivable are estimated
  and matched against sales in the same accounting
  period in which the sales occurred.
• Uncollectible accounts receivable may be
  estimated using
• Percentage of sales
• Aging of accounts receivable

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Recording Estimated Uncollectibles

• Hampton Furniture has credit sales of
  1,200,000, of which 200,000 remains
  uncollected. The credit manager estimates
  12,000 will prove uncollectible.
• Bad Debts Expense 12,000
• Allowance for Doubtful
• Accounts 12,000

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Recording Estimated Uncollectibles

• Bad Debts Expense 12,000
• Allowance for Doubtful
• Accounts 12,000

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Cash (Net) Realizable Value...

• Is the net amount expected to be collected in
  cash.
• Excludes amounts the company estimates it will
  not collect.

Keeps Receivables from Being Overstated on the
Balance Sheet.
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HAMPTON FURNITURE Balance Sheet (partial)
Illustration 8-4

• Current assets
• Cash 14,800
• Accounts receivable 200,000
• Less Allowance for doubtful accounts
  12,000 188,000

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HAMPTON FURNITURE Balance Sheet (partial)
Illustration 8-4

• Current assets
• Cash 14,800
• Accounts receivable 200,000
• Less Allowance for doubtful accounts
  12,000 188,000
• Merchandise Inventory 310,000
• Prepaid Expense 25,000
• Total current assets 537,800

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Write-off of an Uncollectible Account

• The vice president of finance authorizes a
  write-off of 500 owed by R.A.Ware.
• Allowance for Doubtful
• Accounts 500
• Accounts Receivable-Ware 500

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Write-off of an Uncollectible Account

• Allowance for Doubtful
• Accounts 500
• Accounts Receivable-Ware 500

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Before Write-off

• Accounts receivable 200,000
• Less Allowance for doubtful accounts
  12,000 188,000

After Write-off
Accounts receivable 199,500 Less Allowance
for doubtful accounts 11,500 188,000
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Recovery of an Uncollectible Account

• Accounts Receivable-Ware 500
  Allowance
  for Doubtful
• Accounts
  500
• Cash 500
• Accounts Receivable 500

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Percentage of Receivables...

• Management establishes a percentage
  relationship between the amount of receivables
  and the expected losses from uncollectible
  accounts.

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Aging of Accounts Receivable

• The analysis of customer balances by the length
  of time they have been unpaid. The longer a
  debt is outstanding
  the less likely it is to
  
  be paid.

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Notes Receivable...

• Result from sale of goods and services.
• Often called trade receivable.
• Give holder a stronger legal claim to assets than
  accounts receivable.
• Are negotiable instruments and may be transferred
  to another party by endorsement.

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Notes Receivable...

• Credit instrument normally requires
• payment of interest
• extends for time periods of 60-90 days or longer.

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Notes Receivable...

• Are often accepted from customers who need to
  extend payment of an account receivable.
• Are often required
  from high-risk
  customers.

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Maker
Is the party in a promissory note who is making
the promise to pay.
Payee
Payee
Is the party to whom payment of a promissory note
is to be made.
Is the party to whom payment of a promissory note
is to be made.
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Illustration 8-9
Notes Receivable...

• Represent claims for which formal instruments
  of credit are issued as evidence of debt.

2001
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Notes Receivable

• The life of a note may be expressed in months or
  days.
• When the life of a note is expressed in terms of
  months, the due date is found by counting the
  months from the date of issue.

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Notes Receivable

• When the due date is stated in terms of days,
  count the exact number of days to determine the
  maturity date.
• In counting, the date the note is issued is
  omitted but the due date is included.

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Maturity Date
Illustration 8-10
The maturity date of a 60-day note dated July 17
is computed as follows

• Term of note 60 days
• July (31-17) 14
• August 31 45
• Maturity date, September 15

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Formula for Interest
Illustration 8-11
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Notes Receivable...

• are recorded at face value.
• are reported at cash (net) realizable value.
• are honored when paid in full at maturity.
• are dishonored when not paid in full at
  maturity.

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Notes Receivable...

• Interest revenue is recorded when the note is
  paid.
• If interim financial statements are prepared,
  interest on notes receivable is accrued.

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Notes Receivable...

• Each type of receivables should be identified in
  the balance sheet or in the notes to the
  financial statements.
• Short-term receivables are reported in the
  current asset section of the balance sheet below
  short-term investments.
• The gross amount of receivables and the allowance
  for doubtful accounts should be reported.

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Notes Receivable...

• Notes receivable are listed before accounts
  receivable because notes are more easily
  converted to cash.
• Bad debts expense is reported as a selling
  expense in the income statement.
• Interest revenue is shown under Other Revenues
  and Gains in the nonoperating section of the
  income statement.

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Evaluating the Receivables Balance

• Liquidity is measured by how quickly certain
  assets can be converted into cash.
• The receivables turnover ratio measures the
  number of times, on average, receivables are
  collected during
  the period.

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Receivables Turnover Ratio
Illustration 8-17

• Net Credit Sales
• Average Net Receivables

Is a measure of the liquidity of receivables.
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Average Collection Period
Illustration 8-17

• 365 days
• Receivables Turnover Ratio

Is the average amount of time that a receivable
is outstanding
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