3.31 - Today's Topic Financial Accounting Information...

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Today’s Topic PLEASE TURN OFF CELL PHONES Financial Accounting Information System This class will describe GAAP for: Balance Sheet: Accounts Receivable, Allowance for Doubtful  Accounts Income Statement: Bad Debt Expense, Interest Revenue, Credit  Card Expense Statement of Cash Flow effect
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Fig 133 Credit Businesses sell to other businesses without receiving cash; they issue credit This is done because of competition: Orders are filled before cash passes Businesses compete by price and by offering credit This is not usually an option for individual customers When sale is made without cash or written promise to pay, amount due is an accounts receivable
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Fig 134 Revenue Recognition Event 1 Revenue Recognition During 2006, Matrix, Inc. a service company,  During 2006, Matrix, Inc. a service company,  renders services on account for customers in  renders services on account for customers in  the amount of $375,000. the amount of $375,000. Event No. Assets = Liab. + Equity Rev. Exp. = Net Inc. Cash Flow 1 375,000 = NA + 375,000 375,000 NA = 375,000 NA Accounts Receivable 375,000 Revenue 375,000
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Fig 135 Collection for Receivables Event 2 Collection of Receivables During 2006, Matrix, Inc. collects cash of   During 2006, Matrix, Inc. collects cash of   $325,000 on its accounts receivable. $325,000 on its accounts receivable. Event No. Assets = Liab. + Equity Rev. Exp. = Net Inc. Cash Flow 2 Cash + Accts. Rec. 325,000 (325,000) = NA + NA NA NA = NA 325000 OA Cash 325,000 Accounts Receivable 325,000
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Fig 136 Credit Terms and Bad Debts   Some customers may be unwilling or unable to pay  their Accounts Receivable.    To avoid overstating assets, Accounts Receivable are  state at Net Realizable Value on the balance sheet.  Net realizable value is the gross amount of the  receivables less an estimated allowance for doubtful  accounts.
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Fig 137 Credit Terms and Matching   The expense due to customers’ failure to pay  (Bad Debt Expense) should be matched to the Revenue.    Do not know which customer will not pay.    Must estimate an amount for Accounts Receivable as  a whole that will not be collected in the future  (Allowance for Doubtful Accounts).
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Fig 138 Allowance for Doubtful Accounts When preparing Financial Statements, the amount of Accounts Receivable that is uncollectable is estimated. The following transaction is recorded: Bad Debt Expense XXX Allowance for Doubtful Accounts XXX
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Fig 139 Event 3 Recognizing Bad Debts Expense Based upon past experience, on December 31, 2006  Based upon past experience, on December 31, 2006  Matrix, Inc. estimates that $200 of its current accounts  Matrix, Inc. estimates that $200 of its current accounts  receivable balance will eventually prove to be uncollectible. receivable balance will eventually prove to be uncollectible.
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This note was uploaded on 03/31/2008 for the course ACIS 2115 taught by Professor Jayardley during the Spring '07 term at Virginia Tech.

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3.31 - Today's Topic Financial Accounting Information...

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