Chapter 8 - Receivables. In this chapter, you will learn: The methods used to estimate uncollectible accounts and the net realizable value of accounts receivable; how firms estimate and record sales returns and allowances; how to evaluate whether or not receivables arose from real sales. | 1 Amounts due from individuals and other companies that are expected to be collected in cash. Trade Receivables are owed by customers that result from the sale of goods and services. A/R are not supported by a formal document. Accounts Receivable Notes Receivable “Nontrade” (interest, loans to employees or officers, income tax refunds, etc). Other Receivables Receivables 8 3 PowerPoint Slides Balance sheet: What amount should be used? Income statement: When should bad debt expense be recorded? Example: Assume Chuck Co. has: $1,000,000 of sales in December 2015, its first year. All are on credit, terms net 90 days. Gross profit is 40%, operating expenses are $30,000. Now assume that half of all A/R are uncollectible due to poor credit screening and customer bankruptcies. 2 Issues regarding receivables addressed by GAAP: Allowance Method A/R 1,000,000 - uncollectible - 500,000 Net realizable 500,000 ------------------------------------- Sales 1,000,000 CGS -600,000 Gross profit 400,000 Operating exp - 30,000 Bad debt exp - 500,000 Net loss -130,000 Options for 2015 Balance Sheet and Income Statement: 3 Direct Method A/R 1,000,000 ----------------------------------- Sales 1,000,000 CGS -600,000 Gross profit 400,000 - Operating exp - 30,000 Net income 370,000 13 PowerPoint Slides All receivables should be reported their . . . Realizable Value This is the net amount that the company can reasonably expect to collect in cash. 4 GAAP Required Balance Sheet Presentation: Companies don’t know which or when specific receivables will be bad, so . . . . 5 they estimate amounts they think are uncollectible. Use a CONTRA Accounts Receivable account called: Allowance for Doubtful Accounts Example: Accounts Receivable reporting Konk Co. has sales of $5,000,000, of which $700,000 remains uncollected at year end. At year end, December 31, the credit manager estimates $92,000 will prove uncollectible. 6 13 PowerPoint Slides Konk Co. Balance Sheet (partial) Current assets | 1 Amounts due from individuals and other companies that are expected to be collected in cash. Trade Receivables are owed by customers that result from the sale of goods and services. A/R are not supported by a formal document. Accounts Receivable Notes Receivable “Nontrade” (interest, loans to employees or officers, income tax refunds, etc). Other Receivables Receivables 8 3 PowerPoint Slides Balance sheet: What amount should be used? Income statement: When should bad debt expense be recorded? Example: Assume Chuck Co. has: $1,000,000 of sales in December 2015, its first year. All are on credit, terms net 90 days. Gross profit is 40%, operating expenses are $30,000. Now assume that half of all A/R are uncollectible due to poor credit screening and customer bankruptcies. 2 Issues regarding receivables addressed by GAAP: Allowance Method A/R 1,000,000 - uncollectible - 500,000 Net realizable 500,000 ------------------------------------- Sales 1,000,000 CGS -600,000 Gross .
