Module 6 notes

Module 6 notes - Module 6 Operating Assets The three...

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Module 6- Operating Assets The three largest (in terms of dollars) operating assets are Accounts Receivable Inventory PPE (Property plant and equipment) (Service firms will usually not have inventory) This chapter deals with the measurement (what is the dollar value?) and reporting (how do they appear on the Balance Sheet) of these assets. ACCOUNTS RECEIVABLE Accounts receivable—linked to sales revenue; for credit sales (sales on account) A/R is a current asset—expect to collect within year (exception—long term contracts) The seller does not expect to collect the full amount—estimate the amount uncollectible for the period (matching principle) and report it as bad debt expense. Allowance for Uncollectible Accounts (or Allowance for Bad Debts.) How is this allowance calculated? Simple way-- % of A/R Complex but more typically—AGING of Accts/R Aging means breaking the accounts into number of days outstanding (unpaid or due) and, based on past experience or just guessing if you have no past data, come up wth % uncollectible for that age group eg 0-30 100.000 1% 1,000 31-60 30,000 3% 900 61-90 10,000 5% 500 over 90 2,000 20% 400 Total 142,000 2800 so allowance will be 1.97% of A/R The allowance is the amount we expect not to collect. The expense is the amount that adjusts the allowance to the correct amount. For example, if the beginning balance of the allowance is $1,500 (credit) and we know the allowance should be $2,800, the expense we record will be $1,300 See the T-account Allowance for Uncollectibles 1500 (beginning balance) 1300 (adjustment) The journal entry for the adjustment 2800 (ending balance that you see in the T-account is: Bad debt expense 1300 Allowance for uncollectibles 1300 The bad debt expense is an ESTIMATE (and part of adjusting entries at fiscal year end.) What happens if a bad debt is REALIZED? Then you write it off. This means removing the receivable
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from the books. Since you already estimated the bad debt expense, then you do NOT expense it again, but you remove it from the allowance account: Allowance for uncollectibles 1200 Accounts receivable 1200 The effect of the writeoff on NET receivables is zero. Net receivables before writeoff: A/R 142,000 Allow 2,800 Net 139,200 After writeoff A/R 140,800 Allow 1,600 Net 139,200 Remember on the BS that the A/R are always reported net of allowance for bad debts. The allowance is a CONTRA ASSET account. There is usually a footnote explaining the valuation of the A/R (either the amt or proportion of bad debts.) How can we analyze a firm’s A/R? One way—compare percentages over time.
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Module 6 notes - Module 6 Operating Assets The three...

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