Chapter 8 REPORTING AND ANALYZING RECEIVABLES

8-1


8
REPORTING AND
ANALYZING RECEIVABLES

8-2

Financial Accounting, Sixth Edition


Study
Study Objectives
Objectives

8-3

1.

Identify the different types of receivables.

2.

Explain how accounts receivable are recognized in the accounts.

3.

Describe the methods used to account for bad debts.

4.

Compute the interest on notes receivable.

5.

Describe the entries to record the disposition of notes receivable.

6.

Explain the statement presentation of receivables.

7.

Describe the principles of sound accounts receivable
management.

8.

Identify ratios to analyze a company’s receivables.

9.

Describe methods to accelerate the receipt of cash from
receivables.


Reporting
Reporting and
and Analyzing
Analyzing Receivables

Receivables

Types of
Receivables
Accounts
receivable
Notes
receivable
Other
receivables

Accounts
Receivable

Notes
Receivable

Recognizing
accounts
receivable

Determining
maturity date

Valuing
accounts
receivable

Computing
interest

Recognizing
notes
receivable
Valuing notes
receivable
Disposing of
notes
receivable

8-4

Statement
Presentation of
Receivables
Balance
sheet and
notes
Income
statement

Managing
Receivables
Extending
credit
Establishing a
payment
period
Monitoring
collections
Evaluating

liquidity of
receivables
Accelerating
cash receipts


Types
Types of
of Receivables
Receivables
Amounts due from individuals and other companies that are
expected to be collected in cash.
Amounts owed by
customers that
result from the sale
of goods and
services.

Claims for which
formal instruments
of credit are issued
as proof of debt.

“Nontrade”
(interest, loans to
officers, advances
to employees, and
income taxes
refundable).

Accounts
Accounts
Receivable
Receivable

Notes
Notes
Receivable
Receivable

Other
Other
Receivables
Receivables

8-5

SO 1 Identify the different types of receivables.


Types
Types of
of Receivables
Receivables
Amounts due from individuals and other companies that are
expected to be collected in cash.

Illustration 8-1

8-6

SO 1 Identify the different types of receivables.


Accounts
Accounts Receivable
Receivable
Two accounting issues:
1. Recognizing accounts receivable.
2. Valuing accounts receivable.

Recognizing Accounts Receivable

8-7



Service organization - records a receivable when it
provides service on account.



Merchandiser - records accounts receivable at the
point of sale of merchandise on account.
SO 2 Explain how accounts receivable are recognized in the accounts.


Accounts
Accounts Receivable
Receivable

Illustration: Assume that Jordache Co. on July 1, 2012, sells
merchandise on account to Polo Company for $1,000 terms
2/10, n/30. Prepare the journal entry to record this transaction
on the books of Jordache Co.
Jul. 1

Accounts receivable
Sales revenue

8-8

1,000
1,000

SO 2 Explain how accounts receivable are recognized in the accounts.


Accounts
Accounts Receivable
Receivable
Illustration: On July 5, Polo returns merchandise worth $100
to Jordache Co.
Jul. 5

Sales returns and allowances

100

Accounts receivable

100

Illustration: On July 11, Jordache receives payment from
Polo Company for the balance due.
Jul. 11

Cash
Sales discounts ($900 x .02)
Accounts receivable

8-9

882
18
900

SO 2 Explain how accounts receivable are recognized in the accounts.


8-10


Accounts
Accounts Receivable
Receivable
Valuing Accounts Receivables


Current asset.



Valuation (net realizable value).

Uncollectible Accounts Receivable

8-11



Sales on account raise the possibility of accounts not
being collected.



Seller records losses that result from extending credit as
Bad Debts Expense.
SO 3 Describe the methods used to account for bad debts.


Valuing
Valuing Accounts
Accounts Receivable
Receivable
Methods of Accounting for Uncollectible Accounts

Direct Write-Off
Theoretically undesirable:

Allowance Method

Losses are estimated:



No matching.



Better matching.



Receivable not stated at
net realizable value.



Receivable stated at net
realizable value.



Not acceptable for
financial reporting.



Required by GAAP.

8-12

SO 3 Describe the methods used to account for bad debts.


Accounting
Accounting for
for A/R
A/R and
and Bad
Bad Debts
Debts
How
Howare
arethese
theseaccounts
accountspresented
presentedon
onthe
theBalance
BalanceSheet?
Sheet?

Accounts Receivable

Allowance for
Doubtful Accounts

Beg.

500

25

Beg.

End.

500

25

End.

8-13


Assets
Assets
Current
CurrentAssets:
Assets:
Cash
Cash
Accounts
Accountsreceivable
receivable
Less
Lessallowance
allowancefor
fordoubtful

doubtfulaccounts
accounts
Inventory
Inventory
Prepaids
Prepaids
Total
Totalcurrent
currentassets
assets
Fixed
FixedAssets:
Assets:
Office
Officeequipment
equipment
Furniture
Furniture&&fixtures
fixtures
Less:
Less:Accumulated
Accumulateddepreciation
depreciation
Total
Totalfixed
fixedassets
assets
Total
TotalAssets
Assets

8-14

$$ 346
346
500
500
25
25

475
475
812
812
__ 40
40
1,673
1,673
5,679
5,679
6,600
6,600
(3,735)
(3,735)
8,544
8,544
$10,217
$10,217

Assets
Assets
Current
CurrentAssets:
Assets:
Cash
Cash
Accounts
Accountsreceivable,
receivable,net
netof
of$25
$25allowance
allowance
for
fordoubtful
doubtfulaccounts
accounts
Inventory
Inventory
Prepaids
Prepaids
Total
Totalcurrent
currentassets
assets
Fixed
FixedAssets:
Assets:
Office

Officeequipment
equipment
Furniture
Furniture&&fixtures
fixtures
Less:
Less:Accumulated
Accumulateddepreciation
depreciation
Total
Totalfixed
fixedassets
assets
Total
TotalAssets
Assets

8-15

$$ 346
346
475
475
812
812
__ 40
40
1,673
1,673
5,679

5,679
6,600
6,600
(3,735)
(3,735)
8,544
8,544
$10,217
$10,217


Accounting
Accounting for
for A/R
A/R and
and Bad
Bad Debts
Debts
Journal
Journalentry
entryfor
forcredit
creditsale
saleof
of$100?
$100?
Accounts
Accountsreceivable
receivable
Sales

Sales

Accounts Receivable

100
100
100
100

Allowance for
Doubtful Accounts

Beg.

500

25

Beg.

End.

500

25

End.

8-16

Accounting
Accounting for
for A/R
A/R and
and Bad
Bad Debts
Debts
Journal
Journalentry
entryfor
forcredit
creditsale
saleof
of$100?
$100?
Accounts
Accountsreceivable
receivable
Sales
Sales

Accounts Receivable
Beg.

500

Sale

100

End.

600

8-17

100
100
100
100

Allowance for
Doubtful Accounts
25

Beg.

25

End.


Accounting
Accounting for
for A/R
A/R and
and Bad
Bad Debts
Debts

Collected
Collectedof
of$333
$333on
onaccount?
account?
Cash
Cash
Accounts
Accountsreceivable
receivable

Accounts Receivable
Beg.

500

Sale

100

End.

600

8-18

333
333
333

333

Allowance for
Doubtful Accounts
25

Beg.

25

End.


Accounting
Accounting for
for A/R
A/R and
and Bad
Bad Debts
Debts
Collected
Collectedof
of$333
$333on
onaccount?
account?
Cash
Cash
Accounts
Accountsreceivable

receivable

Accounts Receivable
Beg.

500

Sale

100

End.

267

8-19

333

333
333
333
333

Allowance for
Doubtful Accounts
25

Beg.

25

End.

Coll.


Accounting
Accounting for
for A/R
A/R and
and Bad
Bad Debts
Debts
Adjustment
Adjustmentof
of$15
$15for
forestimated
estimatedBad-Debts?
Bad-Debts?
Bad
15
Baddebt
debtexpense
expense
15
Allowance
Allowancefor
forDoubtful

DoubtfulAccounts
Accounts

Accounts Receivable
Beg.

500

Sale

100

End.

267

8-20

333

15
15

Allowance for
Doubtful Accounts
25

Beg.

25

End.

Coll.


Accounting
Accounting for
for A/R
A/R and
and Bad
Bad Debts
Debts
Adjustment
Adjustmentof
of$15
$15for
forestimated
estimatedBad-Debts?
Bad-Debts?
Bad
15
Baddebt
debtexpense
expense
15
Allowance
Allowancefor
forDoubtful
DoubtfulAccounts

Accounts

Accounts Receivable
Beg.

500

Sale

100

End.

267

8-21

333

Coll.

15
15

Allowance for
Doubtful Accounts
25

Beg.

15

Est.

40

End.


Accounting
Accounting for
for A/R
A/R and
and Bad
Bad Debts
Debts
Write-off
Write-offof
ofuncollectible
uncollectibleaccounts
accountsfor
for$10?
$10?
Allowance
Allowancefor
forDoubtful
Doubtfulaccounts
accounts
Accounts
Accountsreceivable

receivable

Accounts Receivable
Beg.

500

Sale

100

End.

267

8-22

333

Coll.

10
10
10
10

Allowance for
Doubtful Accounts
25

Beg.

15

Est.

40

End.


Accounting
Accounting for
for A/R
A/R and
and Bad
Bad Debts
Debts
Write-off
Write-offof
ofuncollectible
uncollectibleaccounts
accountsfor
for$10?
$10?
Allowance
Allowancefor
forDoubtful
Doubtfulaccounts
accounts

Accounts
Accountsreceivable
receivable

Accounts Receivable
Beg.

500

Sale

100

End.
8-23

257

333

Coll.

10

W/O

10
10
10
10

Allowance for
Doubtful Accounts

W/O

25

Beg.

15

Est.

30

End.

10


Assets
Assets
Current
CurrentAssets:
Assets:
Cash
Cash
Accounts
Accountsreceivable,

receivable,net
netof
of$30
$30allowance
allowance
for
fordoubtful
doubtfulaccounts
accounts
Inventory
Inventory
Prepaids
Prepaids
Total
Totalcurrent
currentassets
assets
Fixed
FixedAssets:
Assets:
Office
Officeequipment
equipment
Furniture
Furniture&&fixtures
fixtures
Less:
Less:Accumulated
Accumulateddepreciation
depreciation

Total
Totalfixed
fixedassets
assets
Total
TotalAssets
Assets

8-24

$$ 346
346
227
227
812
812
__ 40
40
1,425
1,425
5,679
5,679
6,600
6,600
(3,735)
(3,735)
8,544
8,544
$$ 9,969
9,969

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Direct Write-off Method for Uncollectible Accounts
Illustration: Assume, for example, that Warden Co.
writes off M. E. Doran’s $200 balance as uncollectible on
December 12. Warden’s entry is:
Bad debts expense
Accounts receivable

8-25

200
200

SO 3 Describe the methods used to account for bad debts.