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Chapter 9

Receivables

TermDefinition
Describing the aging method as the balance sheet approach emphasizes... that the computation is based on ending accounts receivable rather than on net sales for that period
When writing off an individual account, which account is debited? Debit Allowance for Uncollectible Accounts, not Uncollectible Accounts Expense.
Why is the aging method a balance sheet approach? It assumes that a certain proportion of accounts receivable outstanding will not be collected. This amount is the targeted balance of the Allowance for Uncollectible Accounts account.
Regardless of the method used to estimate uncollectible accounts, the total of accounts receivable written off in a period will.... rarely equal the estimated uncollectible amount. It will show a credit balance when the total written off is less than the estimated uncollectible amount. It will show a debit balance when the total written off is greater
Although the write off removes the uncollectible amount from Accounts receivable, it does not affect... the estimated net realizable value of accounts receivable
Occasionally, a customer whose account has been written off as a uncollectible will later be able to pay some or all of the amount owed... When that happens, two entries must be made: One to reverse the earlier write-off and another to show the collection of the account
These are the basis for several calculations that are common to promissory notes: maturity date, duration of the note, interest, maturity value, accrued interest
Maturity Date is the date a promissory note must be paid and must be stated on the note or be determinable from the facts stated on the note
Duration of a note is the time between the promissory note's issue date and its maturity date. Interest is calculated on the basis of the duration of the note.
Interest is the cost of borrowing money or the return on lending money, depending on whether one is the borrower or the lender.
The amount of interest is based on these three factors: Principal (amount of money borrowed or lent), Rate of Interest, Length of the loan Equation- principal X rate of interest /100 X time
Maturity Value is the total proceeds of a promissory note- face value plus interest- at the maturity date
Some notes, called non-interest-bearing notes, do not specify interest rate and the maturity value of these notes is the face value, or principal amount and the principal includes an implied interest cost
dishonored note A note not paid at maturity. The holder, or payee, should transfer the amount due from notes receivable to an individual account receivable for the debtor which keeps it in accounts receivable and helps in deciding whether to extend credit in future
The estimation of uncollectible credit sales affects the... amount of net accounts receivable and operating expenses
Interest income on notes receivable affects the amount of... assets and revenues
Two common measures of the effect of a company's credit policies are... receivables turnover and days' sales uncollected
receivables turnover shows how many times, on average, a company turned its receivables into cash during a period and reflects the relative size of a company's accounts receivable and the success of its credit and collection policies
Receivables turnover is computed by dividing net sales by the average accounts receivable (net of allowances) the numerator should be net credit sales; it is rarely available in public sector so use total net sales
receivables turnover ratio varies substantially from industry to industry.. grocery stores have few receivables so high turnover rate; industrial machinery manufacturing industry have a low turnover rate because it has longer credit terms
day's sales uncollected shows, on average, how long it takes to collect accounts receivable. To determine the days' sales uncollected, the number of days in a year is divided by the receivables turnover
For many businesses with seasonal sales activity, such as Macy's and Nordstrom, receivables are... highest at the balance sheet date, resulting in an artificially low receivables turnover and a high days' sales uncollected
A company that factors its receivables will have a better what? receivables turnover and days' sales uncollected than a company that does not
What is another way companies can finance their receivables? selling or transferring accounts receivable to another entity. Three methods of financing receivables in this way are factoring, securitization, and discounting.
factoring is the sale or transfer of accounts receivable to an entity, called a factor
Factoring can be done with or without... recourse; with recourse means that the seller of the receivables is liable to the factor if a receivable cannot be collected. Without recourse means that the factor bears any losses from unpaid accounts.
Acceptance of credit cards like Visa, MasterCard, or American Express is an example of what? Factoring without recourse because the issuers of the cards accept the risk of nonpayment
In accounting terminology, a seller of receivables with recourse is said to be contingently liable (define) is a potential liability that can develop into a real liability if a particular event occurs in this case it would be nonpayment of receivables and generally requires disclosure
securitization is a process in which a company groups its receivables in batches and sells them at a discount to other companies or investors. When the receivables are paid the buyer gets the full amount.
discounting is a method of financing receivables by selling promissory notes held as notes receivable to a financial lender, usually a bank. The bank derives its profit by deducting the interest from the maturity value of the note.
How can earnings be overstated? by underestimating the amount of losses from uncollectible accounts and understated by overestimating the amount of losses
Allowance method is used to apply what? Accrual accounting to the valuation of accounts receivable
What kind of asset is accounts receivable? short term asset that arise from sales on credit and can be called trade credit
What are the terms of trade credit? 5-60 days and may allow customers to pay in installments
Companies know that some customers may not or will not pay and the uncollected amount goes in what account? Uncollectible accounts (bad debts), expenses of selling on credit Accrual: should be recognized at the time credit sales are made
How do some companies recognize a loss? when they determine that an account is uncollectible by reducing accounts receivable and increasing uncollectible accounts expense and is known as direct charge-off method
direct charge-off method federal regulation requires in computing taxable income
is direct charge-off method accrual accounting? No, it is recorded in a different period and not a method in accord with accrual accounting
GAAP requires the use of what method? The use of the allowance method of accounting for uncollectible accounts
What does interest accrued by notes receivable increase? the payee's interest receivables and interest income
Who accepts promissory notes? Firms that sell durable goods of high value, such as farm machinery and automobiles, often accept promissory notes
What are the advantages of promissory notes? produce interest income and represent a stronger legal claim against a debtor
What does the allowance method rely on? estimates of uncollectible accounts and is in accord with accrual accounting and serves to value accounts receivable on the balance sheet
How is accrual accounting followed? losses from uncollectible accounts must be estimated which become an expense in the period sales are made
What are the different names for the Allowance account and Uncollectible Accounts expense? Allowance Account- allowance for doubtful accounts, allowance for bad debts; uncollectible accounts expense can also be known as uncollectible accounts expense
How does the Uncollectible Accounts Expense appear on the balance sheet? as a contra account, deducted from accounts receivable in the current assets section; reduces accounts receivable to the amount expected to be collectible
What does the "net" amount of accounts receivable approximate? the fair value; not required in disclosure
What happens if management approximates a small loss from uncollectible accounts? resulting net accounts will be larger than if management takes a pessimistic view; net income will also be larger under the optimistic point of view
What does the company accountant make an estimate on? past experience and current economic conditions; losses greater in depression and lower in economic growth; should be realistic
What are the two common methods of estimating uncollectible account expenses? % of net sales and accounts receivable aging method
What is the basis for % of net sales? % of the amount of this years net sales that will not be collected
Why is aging of accounts an important tool in cash management? it helps to determine what amounts are likely to be collected in months ahead
What is the basis for accounts receivable aging method? amount of the ending balance of accounts receivable that will not be collected
What happens when the write offs in a period exceed the amount of the allowance? a debit balance is created in allowances for uncollectible accounts result
Created by: krystalamber04