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					                          7-1




     Chapter 7
    Receivables


Electronic Presentation
 by Douglas Cloud
  Pepperdine University
                                                   7-2


             Learning Goals
1. Describe the common classifications of
                 After studying this
   receivables.
                chapter, you should
2. Summarize and provide examples of internal
                     be able to:
   control procedures that apply to receivables.
3. Describe the nature of and the accounting for
   uncollectible receivables.
4. Describe the allowance method of accounting
   for uncollectible receivables.

                    Continued
                                                  7-3


             Learning Goals
5. Describe the direct write-off method of
   accounting for uncollectible receivables.
6. Describe the nature, characteristics, and
   accounting for notes receivable.
7. Describe the reporting of receivables on the
   balance sheet.
8. Describe the principles of managing
   receivables.

                     Continued
                                                   7-4


             Learning Goals
9. Compute and interpret the accounts receivable
   turnover and the number of days’ sales in
   receivables.
                         7-5




Learning Goal
    Describe the


1   common
    classifications of
    receivables.
                                   7-6




When merchandise or services are
  sold on credit, an accounts
   receivable is established.
                                       7-7



   Most accounts receivable are
expected to be collected in 30 to 60
 days; so, they are current assets.
                                                                                      7-8



                                                      Notes receivable are amounts
                                                     that customers owe for which a
                                                      formal, written instrument of
                                                          credit has been issued.




                                  Dec. 13, 2005


                       Douglas Cloud
I promise to pay__________________________________
  One Thousand Dollars and no/100
____________________________________________
                         6             90
at an interest rate of _____% within ______ days.
                            T. Wood
                         ________________________
                                      7-9




  Notes and accounts receivable
that result from sales transactions
   are sometimes called trade
            receivables.
                              7-10




    Learning Goal

    Summarize and provide


2   examples of internal
    control procedures that
    apply to receivables.
7-11
                        7-12




Learning Goal
    Describe the


3   nature of and the
    accounting for
    uncollectible
    receivables.
                                   7-13




Often when a company issues its
   own credit card, it sells its
receivables to other companies.
This is called factoring and the
   buyer is called the factor.
                        7-14




 Regardless of the
    care used in
granting credit and
   the collection
  procedure used,
 normally a part of
the credit sales will
 not be collectible.
                                         7-15




  The two methods of accounting for
     receivables that appear to be
uncollectible are the allowance method
   and the direct-write-off method.
                        7-16




Learning Goal

    Describe the


4   allowance method
    of accounting for
    uncollectible
    receivables.
                                           7-17



Richards Company, a new company with
 a fiscal period ending on December 31,
   ends the year with $1,000,000 in the
      Accounts Receivable account.

    Based on careful study, Richards
estimates that $40,000 of the $1,000,000
    will eventually be uncollectible.

 A year-end adjusting entry is needed:
                                                   7-18



Dec. 31 Uncollectible Accounts Expense 40,000
           Allowance for Doubtful
             Accounts                         40,000
             Also called Bad
        Because specific customer accounts
            Debts Expense or
           Doubtful Accounts
        cannot be account at this time, the
         A contra identified
                 Expense
             allowance account is used.
            to Accounts
             Receivable
                                        7-19

     Subtracting the balance of the
      allowance account from the
 receivables balance provides the net
realizable value—which is the amount
      Richards expects to collect.


              $1,000,000
                 - 40,000
              $ 960,000
                                                    7-20



       Write-Offs to the Allowance
                Account
   On January 21 John Parker, one of Richards
   Company’s receivables, files for bankruptcy.
     Thus, his account of $6,000 is deemed
  uncollectible. The following entry is required:

Jan. 21 Allowance for Doubtful Accounts   6,000
            Accounts Receivable—J. Parker       6,000
7-21
                                                    7-22




   Collecting a Written-Off Account

     John Parker won the state lottery, so he is
  paying all of his bankruptcy debts. On June 10,
     Richards Co. receive a check for $6,000.
June 10 Accounts Receivable—J. Parker   6,000
          Allowance for Doubtful Accts.         6,000
     10 Cash                            6,000
          Accounts Receivable—J. Parker         6,000
                                                         7-23



          Estimating Uncollectibles
                  Estimate Based on Sales

Allowance for Doubtful Accounts   It is estimated that
                Bal.    7,000         1% of the $3
                       30,000
                                   million in credit
                       37,000
                                  sales will become
                                     uncollectible.
Dec. 31 Uncollectible Accounts Expense 30,000
           Allowance for Doubtful
            Accounts                          30,000
                                                   7-24



    Estimating Uncollectibles
   Estimate Based on Analysis of Receivables

    The process of determining how long a
receivable has been outstanding and attaching
 a percentage to that time period is referred to
           as aging the receivables.
                                            7-25



 Estimating Uncollectibles
Estimate Based on Analysis of Receivables

         The longer an account has been
          outstanding, the less like the
          receivable will be collected.
                                                                                  7-26

         Accounts Receivable Aging and Uncollectibles

                            Not                  Days Past Due
                            Past                                               over
Customer        Balance     Due       1-30   31-60   61-90    91-180 181-365    365
Ashby & Co.       $ 150                      $ 150
B. T. Barr          610                                        $ 350   $260
Brock Co.           470      $ 470


J. Zimmer Co.      160                                                          160
 Total          $86,300    $75,000   $4,000 $3,100   $1,900   $1,200   $800    $300



                          Total accounts receivable
                               shown by age.
                                                                                    7-27

         Accounts Receivable Aging and Uncollectibles

                             Not                     Days Past Due
                             Past                                                over
Customer          Balance    Due        1-30   31-60    61-90   91-180 181-365    365
Ashby & Co.         $ 150                      $ 150
B. T. Barr            610                                        $ 350   $260
Brock Co.             470     $ 470


J. Zimmer Co.        160                                                          160
 Total            $86,300   $75,000    $4,000 $3,100   $1,900   $1,200   $800    $300

 Uncollectibles
   PERCENT                     2%       5%     10%      20%      30%     50%     80%

                                      Uncollectible percentages based on
                                      experience and industry averages.
                                                                                        7-28

         Accounts Receivable Aging and Uncollectibles

                             Not                     Days Past Due
                             Past                                                 over
Customer          Balance    Due       1-30   31-60     61-90   91-180 181-365     365
Ashby & Co.         $ 150                     $ 150
B. T. Barr            610                                        $ 350    $260
Brock Co.             470     $ 470


J. Zimmer Co.        160                                                           160
 Total            $86,300   $75,000   $4,000 $3,100    $1,900   $1,200    $800    $300

 Uncollectibles
   PERCENT                     2%      5%     10%       20%      30%      50%     80%


    AMOUNT $3,390 = $1,500            $200    $310     $380     $360     $400    $240
                                                         7-29



          Estimating Uncollectibles
        Estimate Based on Analysis of Receivables

                                     By aging, it is
Allowance for Doubtful Accounts
                                     estimated that
                Bal.      510
                        2,880     $3,390 of the credit
                        3,390      sales will become
                                     uncollectible.

Dec. 31 Uncollectible Accounts Expense    2,880
           Allowance for Doubtful
            Accounts                                2,880
                                            7-30



 Estimating Uncollectibles
Estimate Based on Analysis of Receivables

 Notice that when the estimation is based
  on accounts receivable, the calculated
 amount is the desired ending balance in
          the allowance account.
                          7-31




Learning Goal



5
    Describe the direct
    write-off method of
    accounting for
    uncollectible
    receivables.
                             7-32



While the allowance method
   is preferred, there are
 situations where the cash
    basis is acceptable.
               7-33




What type of
situations?
                           7-34


 The direct write-off
 method is acceptable
when it is impossible to
accurately estimate the
    uncollectibles.
                                      7-35



   It is also acceptable when a
business sells most of its goods or
services for cash. The amount of
      uncollectibles is small.
                                                        7-36




    D. L. Ross owes Hankin Company $4,200.
   All efforts to collect have failed, so on May 10
    Hankin decides the account is uncollectible.

May 10 Uncollectible Accounts Expense   4,200
          Accounts Receivable—D. L.
            Ross                                4,200

        Note that the direct write-off-method
         debits the expense account at the
                time of the write-off.
                                                       7-37




   On November 21, Hankin receives a check for
           $4,200 from D. L. Ross.

Nov. 21 Accounts Receivable—D. L. Ross 4,200
           Uncollectible Accounts
             Expense                           4,200
    21 Cash                            4,200
          Accounts Receivable—D. L.
            Ross                               4,200
          This entry “reinstates” the debt.
                           7-38




Learning Goal



6
    Describe the nature,
    characteristics, and
    accounting for notes
    receivable.
                                                                  7-39


                 Notes Receivable

  2,500.00
$_____________       Payee
                                             March 16        05
                          Fresno, California______________20___
     Ninety days
 ________________ _AFTER DATE _______ PROMISE TO PAY TO
                                We
                Judson Company
 THE ORDER OF ____________________________________________
 Two thousand five hundred 00/100---------------------------
 _________________________________________________DOLLARS
                  Due Date
               City National Bank
 PAYABLE AT ______________________________________________
                                       Maker
 VALUE RECEIVED WITH INTEREST AT ____10%
       14         June 14, 2005
 NO. _______ DUE___________________
                                        H. B. Lane
                          TREASURER, WILLIARD COMPANY
                                                  7-40




A promissory note is a written document
containing a promise to pay:

 a specific amount of money (principal)
 to a specific person or company (payee)
 by a specific person (maker)
 on a specific date or upon demand
 plus interest at a specific percentage of the
  principal (face) amount per year
                                            7-41

Received a $6,000, 12%, 30-day note dated
 November 21, 2005 from W. A. Bunn in
    settlement of a past-due account.

            Interest Calculation
     Principal x Rate x Time = Interest
       $6,000 x 12% x 30/360 = $60

        Maturity Value Calculation
    Principal + Interest = Maturity Value
          $6,000 + $60 = $6,060
                                                       7-42




             When the note is received.
Nov. 21 Notes Receivable—W. A. Bunn    6,000
           Accounts Receivable—W. A.
             Bunn                              6,000

                 At maturity date.
Dec. 21 Cash                           6,060
           Notes Receivable—W. A. Bunn         6,000
           Interest Revenue                       60
                                                                                          7-43



                                                    If a note matures in a later fiscal
                                                    period, the company holding the
                                                     note makes an adjusting entry
                                                           for accrued interest.




                                  Dec. 13, 2005


                       Douglas Cloud
I promise to pay__________________________________
  One Thousand Dollars and no/100
____________________________________________
                         6             90
at an interest rate of _____% within ______ days.
                            T. Wood
                         ________________________
                                                          7-44


        Crawford Company uses a 90-day, 12%
       note, dated December 1, 2005, to settle its
        account, which has a balance of $4,000.
2005
Dec. 1 Notes Receivable—Crawford Co. 4,000
            Accounts Receivable—
              Crawford Co.                       4,000
Dec. 31 Interest Receivable             40
            Interest Revenue                         40
2006
Mar. 1 Cash                             4,120
          Notes Receivable                     4,000
          Interest Receivable
                              $4,000 x .12 x 30/360
                                                  40
          Interest Revenue                        80
                         7-45




Learning Goal



7
    Describe the
    reporting of
    receivables on the
    balance sheet.
                                                              7-46




             ASSETS                          Sept. 30, 2001
Starbucks’                                   (in thousands)
             Current assets:
               Cash and cash equivalents       $113,237
               Marketable securities            107,312
               Accounts receivable, net of
                allowance of $4,590              90,425
               Inventories                      221,253
               Prepaid expenses and other
                current assets                   61,698
             Total current assets              $593,925
                        7-47




Learning Goal



8
    Describe the
    principles of
    managing accounts
    receivable.
                                     7-48




Screening Customers

            Screening will contact
         …and oftento analyzing
         In addition customers
            the buyer’sapplication
             involves bank and
          the buyer’s assessing
         other documents, the
             and customers should
         which credit references.
              Dunusually requires
              be & Bradstreet
           sellergranted credit.
           an independent credit
          provides credit ratings
                   report…
              for many business
                  customers.
                                     7-49




Determining Credit Terms
     Once a seller has decided to
      grant credit to a buyer, the
     seller must determine credit
          terms for the sale.
                                     7-50




Determining Credit Terms
     This includes determining a
    credit limit which is based on
     the credit worthiness of the
              customer.
                                      7-51




Monitoring Collections

                Sellers should
                    monitor
               concentrations of
             credit risk in any one
             customer or class of
                  customers.
                            7-52




Learning Goal



9
    Compute and
    interpret the
    accounts receivable
    turnover and the
    number of days’
    sales in receivables.
                                                           7-53


       Accounts Receivable Turnover
                                    2006         2005
 Net sales on account            $1,498,000   $1,200,000
 Accounts receivable (net):
   Beginning of year             $ 120,000    $ 140,000
   End of year                     115,500      120,000
   Total                         $ 235,000    $ 260,000
   Average                       $ 117,500    $ 130,000

                                    12.7          9.2
Use: To assess the efficiency
           Net Sales
     in collecting receivables
     and accounts receivable
 Average in the management
                                 $1,498,000 $1,200,000
     of credit
                                  $117,500   $130,000
                                                        7-54


Number of Days’ Sales in Receivables
                                              2006
Net sales on account                       $1,498,000
Accounts receivable (net):
  Beginning of year                        $ 120,000
  End of year                                115,500
  Total                                    $ 235,000
  Average                                  $ 117,500

     Accounts receivable, end of year
                $115,500
                                        = 28 days
         ($1,498,000 ÷ 365 account
     Average daily sales on days)

Use: To assess the efficiency in collecting
     receivables and in the management of credit
               7-55




Chapter 7

     The End
7-56

				
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