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© Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star
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FINANCIAL ACCOUNTING
2ND EDITION
BY
DUCHAC, REEVE, & WARREN
8 Receivables
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LEARNING GOALS
When you finish this chapter, you should be able to
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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 GOALSLEARNING GOALS
Continued
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LEARNING GOALSLEARNING 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
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LEARNING GOALSLEARNING 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.
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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
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LEARNING GOALSLEARNING GOALS
1Describe common classifications of receivables.
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LG 1
Why do companies sell on credit?
Offering credit allows companies to sell more
product.
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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
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LEARNING GOALSLEARNING GOALS
2Describe nature, accounting for uncollectible receivables.
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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.
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RECEIVABLES WRITE-OFFS
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
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LEARNING GOALSLEARNING GOALS
3Describe direct write-off method to account for uncollectible receivables.
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DIRECT WRITE-OFF
Bad debt expense recorded when account
determined to be worthless.
LG 3
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ALLOWANCE METHOD
Bad debt expense estimated at end of accounting period.
LG 4
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How would estimating bad debt expense affect financial
statements?
LG 4
Click the button to skip this journal entry
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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
40,000
SCF BS IS
E
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How would writing off an account under the allowance
method affect financial statements?
LG 4
Click the button to skip this journal entry
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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
6,000
SCF BS IS
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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
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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
5,000
5,000
5,000
SCF BS IS
SCF BS IS
11/21 Acct Receivable: NS
Allow for Dbtful Accts
11/21 Cash
Acct Receivable: NS
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ESTIMATING UNCOLLECTIBLES
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
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PERCENT OF SALES: Method #1
Bad debt expense is estimated by taking a percentage of period
sales.
LG 4
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LG 4
ExTone estimates that 1 1/2 % of 2008 credit sales ($3,000,000) will
be uncollectible.
$3,000,000 * .015 = $45,000
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EXERCISE 8-9aEXERCISE 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
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EXERCISE 8-9cEXERCISE 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
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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.
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EXHIBIT EXHIBIT 22
LG 4
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ADJUSTING ALLOWANCE: Credit Balance
ADJUSTING ALLOWANCE: Credit Balance
Allowance for Doubtful Accounts needs a balance of
$3,390
LG 4
$3,390 - $510 = $2,880
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ENTRY 8/31: Adjustment #1
8/31 Bad Debt Expense 2,880
Allowance for Doubtful Accounts 2,880
LG 4
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LG 4
What happens if the allowance for doubtful
accounts has a debit balance?
The company wrote off more accounts than it
had estimated.
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EXHIBIT EXHIBIT 22
LG 4
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ADJUSTING ALLOWANCE: Debit Balance
ADJUSTING ALLOWANCE: Debit Balance
Allowance for Doubtful Accounts needs a balance of
$3,390
LG 4
$3,390 + 300 = $3,690
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ENTRY 8/31: Adjustment #2
8/31 Bad Debt Expense 3,690
Allowance for Doubtful Accounts 3,690
LG 4
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EXERCISE 8-9bEXERCISE 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
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EXERCISE 8-9dEXERCISE 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
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COMPARING ESTIMATING METHODS
LG 4
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LEARNING GOALSLEARNING GOALS
5Compare direct write-off to allowance methods.
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COMPARING WRITE-OFF METHODS
LG 5
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LEARNING GOALSLEARNING GOALS
6Describe nature, characteristics, accounting for notes receivable.
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LG 6
What is a note receivable?
A note receivable is a written promise to pay money at definite time.
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NOTES RECEIVABLENOTES 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
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EXAMPLEEXAMPLE
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
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How would the note receivable and its collection affect financial statements?
LG 6
Click the button to skip journal entries
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6,000
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
SCF BS IS
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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
6,000
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SCF BS IS
R
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LEARNING GOALSLEARNING GOALS
7Describe reporting for receivables on balance sheet.
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REPORTING RECEIVABLESREPORTING 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
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LEARNING GOALSLEARNING GOALS
8Describe principles for managing accounts receivable.
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LG 8
3 Steps for managing receivables are
1) Screening customers
2) Determining credit terms
3) Monitoring collections
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LEARNING GOALSLEARNING GOALS
9Compute, interpret accounts receivable turnover, number days sales in receivables.
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ACCOUNTS RECEIVABLE TURNOVER
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
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STARBUCKS’ TURNOVERSTARBUCKS’ TURNOVER
2004 2003 2002
Net Sales $5,294.2 $4,075.5 ------
Net A/R 140.2 114.4 $97.6
2004 A/R turnover =
$5,294.2/{(140.2 + 114.4)/2} = 41.6
LG 9
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What is Starbucks’ accounts receivable turnover for 2003?
LG 9
2003 A/R turnover =
$4,075.5 /{(114.4 + 97.6)/2} = 38.5
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ANALYSIS: TurnoverANALYSIS: Turnover
Trend for accounts receivable turnover:
Starbucks improved its accounts receivable turnover in 2004.
Trend for accounts receivable turnover:
Starbucks improved its accounts receivable turnover in 2004.
LG 8
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DAYS IN SALESDAYS 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
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STARBUCKS DAYS IN SALES
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
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What is Starbucks’ days in sales for 2003?
LG 9
Starbucks’ average days in sales for 2003 is
($106/ 11.2) =
9.5
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ANALYSIS: Days in SalesANALYSIS: Days in Sales
Starbucks collected its accounts receivable almost 1 day faster in
2004 than in 2003.
Starbucks collected its accounts receivable almost 1 day faster in
2004 than in 2003.
LG 8
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THE END
CHAPTER 8