Tools for Business Decision Making, 2nd Ed.
Kimmel, Weygandt, Kieso
1

Chapter 8
Reporting and Analyzing
Receivables
After studying Chapter 8, you should be able to :
 Identify the different types of receivables.
 Explain how accounts receivable are recognized in the accounts.
 Describe the methods used to account for bad debts.
 Compute the maturity date of and interest on notes receivable.
 Describe the entries to record the disposition of notes receivable.
3

Chapter 8
Reporting and Analyzing
Receivables
After studying Chapter 8, you should be able to:
 Explain the statement presentation of receivables.
 Describe the principles of sound accounts receivable management.
 Identify ratios to analyze a company's receivables.
 Describe methods to accelerate the receipt of cash from receivables.
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 Amounts due from individuals and companies- expected to be collected in cash.
 Frequently classified as:
 Accounts receivable
 Notes receivable
 Other receivables
5

 Amounts owed by customers on account.
 Result from the sale of goods/services.
 Expected to be collected within 30-60 days.
 Most significant type of claim held by company.
 Often called trade receivables.
6

Illustration 8-9
Represent claims for which formal instruments of credit are issued as evidence of debt.
2001
7

Nontrade including:
 interest receivable
 loans to company officers
 advances to employees
 income taxes refundable
8

Are recorded when service is provided or at point of sale of merchandise on account.
Accounts Receivable 100
Sales 100
9

Bad Debts Expense...
Is an expense to record estimated uncollectible receivables.
Keeps Expenses from Being Understated on the Income Statement.
10

 The Direct Write-off
Method
 The Allowance
Method
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 Bad debt losses are not estimated.
 No allowance account is used.
 Accounts are written off when determined uncollectible as follows:
Bad Debts Expense 200
Accounts Receivable--M. E. Doran 200
Bad debt expense will show only actual losses.
Accounts receivable will be reported at gross amount.
12

 Uncollectible accounts receivable are estimated and matched against sales in the same accounting period in which the sales occurred.
 Uncollectible accounts receivable may be estimated using:
 Percentage of sales
 Aging of accounts receivable
13

Hampton Furniture has credit sales of
$1,200,000, of which $200,000 remains uncollected. The credit manager estimates
$12,000 will prove uncollectible.
Bad Debts Expense 12,000
Allowance for Doubtful
Accounts 12,000
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Bad Debts Expense 12,000
Allowance for Doubtful
Accounts 12,000
Accounts Receivable
Jan 1 Bal 200,000
Allowance for
Doubtful Accounts
Jan 1 Bal 12,000
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 Is the net amount expected to be collected in cash.
 Excludes amounts the company estimates it will not collect.
Keeps Receivables from Being Overstated on the Balance Sheet.
16

HAMPTON FURNITURE
Balance Sheet (partial)
Illustration 8-4
Current assets
Cash
Accounts receivable $200,000
$ 14,800
Less: Allowance for doubtful accounts 12,000 188,000
Cash (net) Realizable Value

HAMPTON FURNITURE
Balance Sheet (partial)
Illustration 8-4
Current assets
Cash
Accounts receivable $200,000
$ 14,800
Less: Allowance for doubtful accounts 12,000 188,000
Merchandise Inventory 310,000
Prepaid Expense
Total current assets
25,000
$537,800

The vice president of finance authorizes a write-off of $500 owed by R.A.Ware.
Allowance for Doubtful
Accounts
Accounts Receivable-Ware
500
500
19

Illustration 8-5
Allowance for Doubtful
Accounts 500
Accounts Receivable-Ware 500
Accounts Receivable
Jan 1 Bal 200,000 Mar 1 500
Mar 1 Bal 199,500
Allowance for
Doubtful Accounts
Mar 1 500 Jan 1 Bal 12,000
Mar 1 Bal 11,500
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Before Write-off
Illustration 8-6
Current assets
Cash
Accounts receivable $200,000
$ 14,800
Less: Allowance for doubtful accounts 12,000 188,000
Cash Realizable Value
After Write-off
Current assets
Cash $ 14,800
Accounts receivable $199,500
Less: Allowance for doubtful accounts 11,500 188,000
Cash Realizable Value

Accounts Receivable-Ware 500
Allowance for Doubtful
Accounts 500
Cash
Accounts Receivable
500
500
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Management establishes a percentage relationship between the amount of receivables and the expected losses from uncollectible accounts.
23

The analysis of customer balances by the length of time they have been unpaid. The longer a debt is outstanding the less likely it is to be paid.
24

Notes and accounts receivables that result from sales transactions.
25

 Result from sale of goods and services.
 Often called trade receivable.
 Give holder a stronger legal claim to assets than accounts receivable.
 Are negotiable instruments and may be transferred to another party by endorsement.
26

Credit instrument normally requires:
 payment of interest
 extends for time periods of 60-90 days or longer.
27

 Are often accepted from customers who need to extend payment of an account receivable.
 Are often required from high-risk customers.
28

 The life of a note may be expressed in months or days.
 When the life of a note is expressed in terms of months, the due date is found by counting the months from the date of issue.
29

 When the due date is stated in terms of days, count the exact number of days to determine the maturity date.
 In counting, the date the note is issued is omitted but the due date is included.
30

Illustration 8-9
Represent claims for which formal instruments of credit are issued as evidence of debt.
2001
31

Illustration 8-10
The maturity date of a 60-day note dated July 17 is computed as follows:
Term of note 60 days
July (31-17) 14
August 31 45
Maturity date, September 15
32

Maker
Is the party in a promissory note who is making the promise to pay.
Is the party to whom payment of a promissory note is to be made.
33

Formula for Interest
Illustration 8-11

 are recorded at face value.
 are reported at cash
(net) realizable value.
 are honored when paid in full at maturity.
 are dishonored when not paid in full at maturity.
35

 Interest revenue is recorded when the note is paid.
 If interim financial statements are prepared, interest on notes receivable is accrued.
36

 Each type of receivables should be identified in the balance sheet or in the notes to the financial statements.
 Short-term receivables are reported in the current asset section of the balance sheet below short-term investments.
 The gross amount of receivables and the allowance for doubtful accounts should be reported.
37


Notes receivable are listed before accounts receivable because notes are more easily converted to cash.

Bad debts expense is reported as a selling expense in the income statement.

Interest revenue is shown under
Other Revenues and Gains in the nonoperating section of the income statement.
38

 Determine to whom to extend credit.
 Establish a payment period.
 Monitor collections.
 Evaluate receivables balance.
 Accelerate cash receipts from receivables when necessary.
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 Risky customers might be required to provide letters of credit or bank guarantees.
 Risky customers might be required to pay cash on delivery (COD).
 Ask potential customers for references from banks and suppliers and check the references.
 Periodically check financial health of continuing customers.
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 Determine a required payment period and communicate that policy to customers.
 Make sure company's payment period is consistent with that of competitors.
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 Calculate company’s credit risk ratio.
 Prepare accounts receivable aging schedule at least monthly.
 Pursue problem accounts with:
 phone calls
 letters
 legal action if necessary.
42

Illustration 8-14
Is a measure of the risk that a company’s customers may not pay their accounts.
Credit Risk Ratio=
Allowance for Doubtful Accounts
Accounts Receivables
Changes in credit risk ratio over time suggests that a company’s overall credit risk is increasing and decreasing.
43

Is a threat of nonpayment from a single customer or class of customers that could adversely affect the financial health of the company.
44

 Liquidity is measured by how quickly certain assets can be converted into cash.
 The receivables turnover ratio measures the number of times, on average, receivables are collected during the period.
45

Illustration 8-17
Net Credit Sales
Average Net Receivables
Is a measure of the liquidity of receivables
.
46

Illustration 8-17
365 days
Receivables Turnover Ratio
Is the average amount of time that a receivable is outstanding
47

Accelerating Cash Receipts
Waiting for the normal collection process cost money.
48

Accelerating Cash Receipts
A bird in the hand is worth two in the bush.
49

Companies Sell Receivables
 They get more sales if they provide financing to customers.
 General Motors Acceptance Corporation
 Ford Motor Credit Corporation
 They may be the only reasonable source of cash.
 Billing and collection are often time-consuming and costly.
50

Is a finance company or bank that buys receivables from businesses for a fee and then collects payments directly from the customers.
51

Expense Associated with Selling
Receivables
 If a company usually sells its receivables, the service charge expense is recorded as a selling expense.
 However, if receivables are sold infrequently the fee may be reported under Other Expenses and Losses in the income statement.
52

A common type of credit card is a national credit card such as:
 Visa
 Master Card
 American Express.
53

Three parties are involved when national credit cards are used in making retail sales:
 the credit card issuer
 the retailer
 the customer
54

 Sales resulting from the use of VISA and
MasterCard are considered cash sales by the retailer.
 Upon receipt of credit card sales slips from a retailer, the bank immediately adds the amount to the seller's bank balance.
55

Advantages of Credit
Cards to the Retailer
Illustration 8-18

Advantages of Credit
Cards to the Retailer
Illustration 8-18
57

Advantages of Credit
Cards to the Retailer
Illustration 8-18
58

Advantages of Credit
Cards to the Retailer
Illustration 8-18
59

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