Accounting Cheat Sheet.doc - Accounts Receivable Bad Debt...

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Accounts Receivable, Bad Debt Allowance, Returns Net AR = AR (Total amount owed to customers) – AFDA (net means it is taking allowance into account) Increases in AFDA result from new periodic estimations of default; decreases in AFDA result from permanent write-offs of particular AR Gross Sales = Net Sales (from I/S) + BD Expense = Revenue + Allowance Cash collected from customers = NR - Δ in net AR Amt. expected to collect from customers = Net AR (found in B/S) Total amt. owed to company from customers = Net AR + AFDA EB Estimating Bad Debt – 2 Methods Percentage of Credit Sales Method Average % of Credit Sales that result in Bad Debt = Total Bad Debt Loses/Total Credit Sales Aging of Accounts Receivable Method - Too HIGH Dr. AFDA and Cr. BD Expense (Gain) - Too LOW Dr. BD Expense (Loss) and Cr. AFDA % of Credit Sales – directly compute amount to be recorded as BD Expense on the I/S Aging – compute the final ending balance we would like to have in the AFDA on the B/S Bad Debt Expense = Δ Allowance + Write-Offs - Working Capital (Current Assets – Current Liabilities) not influenced by Write-Off asset account (AR) and contra-asset account (AFDA) reduced/increase by same amount - Working Capital influenced by Bad Debt Expense when BDE recorded, AFDA increases which results in a decrease in WC AND when BDE recorded, Tax Expenses decrease which results in an increase in WC Net Δ WC = BDE - Δ Taxes Payable - Write off has no influence on Net Income - Bad Debt Expense has an influence on Net Income because BDE reduces income before taxes but also reduces tax expenses results in a change in NI Direct Write-Off Method – record default when it is realized the creditor will not pay [incorrect NI] Allowance Method – (1) Est. uncollectible A/C Receivable based on history, (2) update Allowance for Doubtful Accounts Retained Earnings will be greater by xxx if company used direct write-off method instead of allowance, the xxx figure can be found as the EB of AFDA New BD Estimations (additions to Bad Debt Expense) increase AFDA, Write-offs decrease AFDA BTNI will be xxx greater if company used direct write-off method instead of allowance, the xxx figure = additions charged to expense – deductions from reserves Step Timing Accounts Affected Fin.State. Effects (1) Record estimated bad debts adjustment End of period in which sales are made BD Expense (E) Net Income ↓ AFDA (XA) Assets (AR, Net) (2) Identify and write off actual bad debts Throughout period as bad debts realized AR (A) ↓ Net Income N/A AFDA (XA) ↓ Assets (AR, Net) N/A Net Accounts Receivable BB = Begin Gross A/R – Begin All. Net Sales Revenue = Gross Sales Rev. – BD Expense Other Increase Cash Collections Other Decreases EB = End Gross A/R – End All. (If AR increases, NI on SCF is overstated, and hence should subtract the change of AR) Cash Collected in a Period = NR (Sales) – Δ Accounts Receivable (+ Δ Unearned Revenue Account) Cash Paid to SS = COGS + Δ Inventory – Δ Payable Effect of non-operating transactions on Net AR =
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