ch08 - Chapter 8 Reporting and Analyzing Receivables Study...

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Chapter 8 Reporting and Analyzing Receivables Study Objectives 1. Identify the different types of receivables. 2. Explain how accounts receivable are recognized in the accounts. 3. Describe the methods used to account for bad debts. 4. Compute the interest on notes receivable. 5. Describe the entries to record the disposition of notes receivable. 6. Explain the statement presentation of receivables. 7. Describe the principles of sound accounts receivable management. 8. Identify ratios to analyze a company's receivables. 9. Describe methods to accelerate the receipt of cash from receivables. Study Objective 1 - Identify the Different Types of Receivables The term receivables refers to amounts due from individuals and companies. Receivables are claims that are expected to be collected in cash. Receivables represent one of a company’s most liquid assets. Receivables are frequently classified as: Accounts receivable: Are amounts owed by customers on account. Result from the sale of goods and services (often called trade receivables ). Are expected to be collected within 30 to 60 days. are usually the most significant type of claim held by a company.
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Notes receivable: Represent claims for which formal instruments of credit are issued as evidence of debt. Are credit instruments that normally require payment of interest and extend for time periods of 60-90 days or longer. May result from sale of goods and services (often called trade receivables ). Other receivables: Nontrade receivables including interest receivable, loans to company officers, advances to employees, and income taxes refundable. Generally classified and reported as separate items in the balance sheet. Study Objective 2 - Explain how Accounts Receivable are Recognized in the Accounts Two accounting problems associated with accounts receivable are: 1. Recognizing accounts receivable 2. Valuing accounts receivable Recognizing accounts receivable Service organizations -- A receivable is recorded when service is provided on account. Debit accounts receivable and credit service revenue Merchandisers – A receivable is recorded at the point of sale of merchandise on account. Debit accounts receivable and credit sales Receivable may be reduced by sales discount and/or sales return Valuing accounts receivable Some accounts receivable will become uncollectible. This creates bad debt expense – a normal and necessary risk of doing business on credit. Study Objective 3 - Describe the Methods Used to Account for Bad Debts Two methods are used in accounting for uncollectible accounts: 1. Direct Write-off Method
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2. Allowance Method Direct write-off method When a specific account is determined to be uncollectible, the loss is charged to Bad Debt Expense .
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