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FINANCIAL ACCOUNTING
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LEARNING GOALS
LEARNING GOALS
1. Describe common classifications of receivables. 2. Describe nature, accounting for uncollectible receivables. 3. Describe direct write-off method to account for uncollectible receivables.
Continued
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LEARNING 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 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
LEARNING GOALS
LG 1
LG 1
CLASSIFYING RECEIVABLES
Accounts receivable
Short term credit 30 60 days
Notes receivable
Longer term May be 1 year or more
Other receivables
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LEARNING GOALS
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LG 2
Companies must recognize an expense to write off accounts that are not collectible.
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LG 2
RECEIVABLES WRITEOFFS
2 methods to acknowledge uncollectible accounts expense
Direct write-off (not allowed by GAAP) Allowance method
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LEARNING GOALS
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LG 3
DIRECT WRITE-OFF
Bad debt expense recorded when account determined to be worthless.
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LG 4
ALLOWANCE METHOD
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LG 4
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LG 4
40,000 40,000
Estimating bad debt expense Has no effect on cash flows Decreases assets, equity on balance sheet Increases expense on income statement
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LG 4
How would writing off an account under the allowance method affect financial statements?
Click the button to skip this journal entry
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LG 4
6,000 6,000
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
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LG 3
LG 4
SCF
BS
IS
Collection of previously written-off account Increases cash flow, operations Has no effect on balance sheet Has no effect on income statement
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LG 4
ESTIMATING UNCOLLECTIBLES
2 methods to estimate uncollectibles
Method #1
Based on % of sales
Method #2
Based on analyzing receivables
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LG 4
PERCENT OF SALES:
Method #1
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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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LG 4
EXERCISE 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 of 1% of net sales.
BDE = $15,000 Press Enter or click left mouse button for answer.
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LG 4
EXERCISE 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 of 1% of net sales.
BDE = $30,000 Press Enter or click left mouse button for answer.
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LG 4
ANALYZING RECEIVABLES:
Method #2 Bad debt expense is estimated by taking a percentage of overdue accounts.
Allowance is adjusted to a credit balance equal to the bad debt expense estimate.
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LG 4
EXHIBIT 2
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LG 4
ADJUSTING ALLOWANCE:
Credit Balance
$3,390
$3,390 - $510 = $2,880
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LG 4
2,880 2,880
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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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LG 4
EXHIBIT 2
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LG 4
ADJUSTING ALLOWANCE:
Debit Balance
$3,390
$3,390 + 300 = $3,690
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LG 4
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LG 4
EXERCISE 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. BDE = $14,600 Press Enter or click left mouse button for answer.
Click the button to skip this exercise.
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LG 4
EXERCISE 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. BDE = $36,450 Press Enter or click left mouse button for answer.
Click the button to skip this exercise.
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LG 4
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LEARNING GOALS
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LG 5
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LEARNING GOALS
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LG 6
LG 6
NOTES RECEIVABLE
Have a maturity date
Due date for payment
Pay interest Interest = Principal * Rate * Time Time is expressed as part of year
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LG 6
EXAMPLE
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
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LG 6
How would the note receivable and its collection affect financial statements?
Click the button to skip journal entries
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LG 6
6,000 6,000
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
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LG 6
6,060 6,000 60
Collecting a note receivable Increases cash flow, operations Has net increase on assets, equity on balance sheet Increases revenue on income statement
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LEARNING GOALS
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LG 7
REPORTING 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
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LEARNING GOALS
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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 GOALS
Compute, interpret accounts receivable turnover, number days sales in receivables.
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LG 9
LG 9
STARBUCKS TURNOVER
2004 Net Sales Net A/R 2003 2002 $5,294.2 $4,075.5 -----140.2 114.4 $97.6
LG 9
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LG 8
ANALYSIS: Turnover
Trend for accounts receivable turnover: Starbucks improved its accounts receivable turnover in 2004.
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LG 9
DAYS IN SALES
Days in sales estimates the length of time accounts receivable have been outstanding on average.
LG 9
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LG 9
LG 8
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CHAPTER 8
THE END
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