1 / 63

Accounting for Receivables and Investments

This module covers the accounting for accounts receivable and investments, including bad debts, evaluation of receivables, accounting for interest-bearing notes, techniques to accelerate cash inflow, and accounting for various types of investments.

alliej
Download Presentation

Accounting for Receivables and Investments

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter 7 Receivables and Investments

  2. Learning Objectives LO1 Explain how to account for accounts receivable, including bad debts. LO2Explain how information about sales and receivables can be combined to evaluate how efficient a company is in collecting its receivables. LO3Explain how to account for interest-bearing notes receivable. LO4 Explain various techniques that companies use to accelerate the inflow of cash from sales. LO5Explain the accounting for and disclosure of various types of investments that companies make. LO6Explain the effects of transactions involving liquid assets on the statement of cash flows.

  3. Module 1 Accounting for Accounts Receivable Companies report accounts receivable on the balance sheet An allowance is subtracted from the balance of accounts receivable The relationship between sales on the income statement and accounts receivable on the balance sheet can be used to assess a company’s performance Module 1

  4. Accounts Receivable Account receivable: A receivable arising from the sale of goods or services with a verbal promise to pay Companies track the balance owed by each customer on a subsidiary ledger Module 1: LO 1

  5. Subsidiary Ledger Subsidiary ledger: detail for a number of individual items that collectively make up a single general ledger account Control account: general ledger account that is supported by a subsidiary ledger Module 1: LO 1

  6. The Use of a Subsidiary Ledger Assume that Apple sells $25,000 of hardware to a school. The journal entry to record the sale would be as follows: Module 1: LO 1

  7. Subsidiary Ledger Module 1: LO 1

  8. Two Methods to Account for Bad Debts • Direct write-off method: recognition of bad debts expense at the point an account is written off as uncollectible • Allowance method: estimating bad debts on the basis of either net credit sales or accounts receivable • Allowance for doubtful accounts: a contra-asset account—reduce accounts receivable to its net realizable value Module 1: LO 1

  9. Example 7-1—Using the Direct Write-Off Method for Bad Debts Assume that Roberts Corp. makes a $500 sale to Dexter Inc. on November 10, 2016, with credit terms of 2/10, n/60. Roberts makes the following entry on its books on this date: Module 1: LO 1

  10. Example 7-1—Using the Direct Write-Off Method for Bad Debts (continued) Assume further that Dexter is unable to pay and that the account has to be written off. To do so, the accounting department makes the following entry: Module 1: LO 1

  11. Deficiencies of the Direct Write-Off Method • Balance sheet effect: • By ignoring the possibility that not all of its outstanding accounts receivable will be collected, Roberts is overstating the value of this asset at December 31, 2016 • Income statement effect: • By ignoring the possibility of bad debts on sales made during 2016, Roberts has violated the matching principle and has overstated net income for 2016 by ignoring bad debts as expense Module 1: LO 1

  12. Example 7-2—Using the Allowance Method for Bad Debts Assume that Roberts’ total sales during 2016 amount to $600,000 and that at the end of the year, the outstanding accounts receivable total $250,000. Also, assume that Roberts estimates that 1% of the sales of the period, or $6,000, will prove to be uncollectible Under the allowance method, Roberts makes the following adjusting entry at the end of 2016: Module 1: LO 1

  13. Example 7-2—Using the Allowance Method for Bad Debts (continued) Assume, as we did earlier, that Dexter’s $500 account is written off on May 1, 2017 Under the allowance method, the following entry is recorded: Module 1: LO 1

  14. Two Approaches to the Allowance Method of Accounting for Bad Debts • Percentage of Net Credit Sales Approach • Uses the past relationship between bad debts and net credit sales to predict bad debt amounts • Percentage of Accounts Receivable Approach • Estimate bad debts by relating them to the balance in the Accounts Receivable Module 1: LO 1

  15. Example 7-3—Percentage of Net Credit Sales Approach Average percentage = 2% ($153,700/$7,560,000 = 0.02033) Assume that the accounting records for Bosco Corp. reveal the following: Module 1: LO 1

  16. Example 7-3—Percentage of Net Credit Sales Approach (continued) Assuming that it uses the 2% rate and that its net credit sales during 2016 are $2,340,000, Bosco makes the following entry: Module 1: LO 1

  17. Example 7-4—Percentage of Accounts Receivable Approach Average percentage = 0.8% ($32,330/$4,038,000 = 0.008) Assume that the records for Cougar Corp. reveal the following: Module 1: LO 1

  18. Example 7-4—Percentage of Accounts Receivable Approach (continued) Assuming balances in Accounts Receivable and Allowance for Doubtful Accounts on December 31, 2016, of $865,000 and $2,100, respectively, Cougar records the following entry: Module 1: LO 1

  19. Exhibit 7-1—Aging Schedule Aging schedule: categorizes the various accounts according to their length of time outstanding Module 1: LO 1

  20. Example 7-5—Using an Aging Schedule to Estimate Bad Debts The totals on the aging schedule are used as the basis for estimating bad debts, as shown below: Module 1: LO 1

  21. Example 7-5—Using an Aging Schedule to Estimate Bad Debts (continued) Assume that Allowance for Doubtful Accounts has a balance of $1,230 before adjustment, the adjusting entry is as follows: Module 1: LO 1

  22. The Accounts Receivable Turnover Ratio Measures the number of times an accounts receivable is collected during the period Accounts Receivable = Net Credit Sales Turnover Ratio Average Accounts Receivable Module 1: LO 2

  23. Number of Days’ Sales in Receivables Measures how long it takes to collect receivables Number of Days' = Number of Days in the Period Sales in ReceivablesAccounts Receivable Turnover Ratio Module 1: LO 2

  24. The Ratio Analysis Model How many times a year does a company turn over its accounts receivable? Gather the information about net credit sales and average accounts receivable Calculate accounts receivable turnover ratio Compare the ratio with prior years and with competitors Interpret the ratios—measures how long it takes to collect receivables Module 1: LO 2

  25. Calculate the Ratio Analysis Module 1: LO 2

  26. The Business Decision Model If you were a banker, would you loan money to a company? Gather information from the financial statements and other sources Compare the company's accounts receivable turnover ratiowith industry averages and look at trends Lend money or find an alternative use for the money Monitor the loan periodically Module 1: LO 2

  27. Module 2 Accounting for Notes Receivable Companies report interest-bearing notes receivable on the balance sheet Module 2

  28. Accounting for Notes Receivable Asset resulting from the acceptance of a promissory note from another entity Over the life of the note the payee earns interest revenue on its note receivable Module 2: LO 3

  29. Notes Receivable Promissory note: a written promise to repay a definite sum of money on demand or at a fixed or determinable date in the future Maker: party that agrees to repay the money Payee: party that will receive the money Note payable: a liability resulting from the signing of a promissory note Module 2: LO 3

  30. Relationship Between Maker and Payee Module 2: LO 3

  31. Important Terms Connected with Promissory Notes Principal: the cash received, or the fair value of the products or services received, by the maker when a promissory note is issued Maturity date: the due date of promissory note Term: the length of time a note is outstanding Maturity value: the amount to be paid by the maker on the maturity date Interest: the difference between the principal amount and the maturity value Module 2: LO 3

  32. Example 7-7—Accounting for a Note Receivable Interest earned = $15,000 × 0.12 × (90/360) = $450 Assume that on December 13, 2016, High Tec sells a computer to Baker Corp. at an invoice price of $15,000 Because Baker is short of cash, it gives High Tec a 90-day, 12% promissory note. The total amount of interest due on the maturity date is determined as follows: Module 2: LO 3

  33. Example 7-7—Accounting for a Note Receivable (continued) The entry to record receipt of the note by High Tec is as follows: Module 2: LO 3

  34. Example 7-7—Accounting for a Note Receivable (continued) In computing interest, it is normal practice to count the day a note matures but not the day it is signed Interest would be earned for 18 days (December 14 to December 31) during 2016 and for 72 days in 2017: Module 2: LO 3

  35. Example 7-7—Accounting for a Note Receivable (continued) The amount of interest earned during 2016 is $15,000 x 0.12 x 18/360, or $90 An adjusting entry is made on December 31 to record interest earned during 2016: Module 2: LO 3

  36. Example 7-7—Accounting for a Note Receivable (continued) Interest earned = $15,000 × 0.12 × (72/360) = $360 On March 13, 2017, High Tec collects the principal amount of the note and interest from Baker and records this entry: Module 2: LO 3

  37. Accelerating the Inflow of Cashfrom Sales • Credit card sales • Accelerate collection of cash from a customer • Pass the risk of nonpayment to credit card company • Discounting notes receivable • Allows a company to accelerate the inflow of cash Module 2: LO 4

  38. Exhibit 7-2—Basic Relationships Among Parties with Credit Card Sales Module 2: LO 4

  39. Example 7-8—Accounting for Credit Card Sales Assume that Joe Smith buys an iPad in an Apple store and charges the $500 cost to his VISA card Assume that total credit card sales on June 5 amount to $8,000 The entry on Apple’s books is as follows: Module 2: LO 4

  40. Example 7-8—Accounting for Credit Card Sales (continued) Assume that Apple remits the credit card receipts to VISA once a week and that the total sales for the week ending June 11 amount to $50,000 Further assume that on June 13, VISA pays the amount due to Apple after deducting a 5% collection fee The entry on Apple’s books is as follows: Module 2: LO 4

  41. Example 7-8—Accounting for Credit Card Sales (continued) Assume that on July 9, Apple presents VISA credit card receipts to its bank for payment in the amount of $20,000 and that the collection charge is 4%. The entry on its books on the date of deposit is as follows: Module 2: LO 4

  42. Discounting Notes Receivable • Discounting: the process of selling a promissory note • Company can sell note prior to maturity date for cash • It is normally done ‘‘with recourse” • If the original customer fails to pay the bank, the company that transferred the note to the bank is liable for the full amount Module 2: LO 4

  43. Module 3 Accounting for Investments Companies make different types of investments Companies report short-term investments on the balance sheets Companies earn income from these investments Module 3

  44. Accounting for Investments Equity securities (stocks): issued by corporations as a form of ownership in the business Debt securities (bonds): issued by corporations and governmental bodies as a form of borrowing Certificate of Deposit (CD): a highly liquid financial instrument Module 3: LO 5

  45. Example 7-9—Accounting for an Investment in a Certificate of Deposit On October 2, 2016, Creston Corp. invests $100,000 in a 120-day CD The CD matures on January 30, 2017, at which time Creston receives the $100,000 and interest at an annual rate of 6% The entry to record the purchase of the CD is as follows: Module 3: LO 5

  46. Example 7-9—Accounting for an Investment in a Certificate of Deposit (continued) December 31 is the end of Creston’s fiscal year, so an entry is needed on this date to record interest earned during 2016 even though no cash will be received until the CD matures in 2017: Module 3: LO 5

  47. Example 7-9—Accounting for an Investment in a Certificate of Deposit (continued) The entry on January 30 to record the receipt of the principal amount of the CD of $100,000 and interest for 120 days is as follows: Module 3: LO 5

  48. Exhibit 7-3—Interest Calculation Module 3: LO 5

  49. Investments in Stocks and Bonds Module 3: LO 5

  50. Example 7-10—Accounting for an Investment in Bonds Assume that Atlantic buys $100,000 bonds at face value The bonds pay 10% interest semiannually on June 30 and December 31 Atlantic will receive 5% of $100,000, or $5,000, on each of those dates The entry on Atlantic’s books to record the purchase is as follows: Module 3: LO 5

More Related