1. Accounting for Current Assets

1. Accounting for Current Assets - Accounting for Current...

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Dr. Mimi Alciatore 1 Accounting for Current Assets Dr. Mimi Alciatore Dr. Mimi Alciatore 2 Assets FASB Definition: Probable Future Economic Benefits Dr. Mimi Alciatore 3 Current Assets Expect to Use or Convert to Cash Within One Year
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Dr. Mimi Alciatore 2 Dr. Mimi Alciatore 4 Cash (Currency, Checking & Savings Accounts) (Highly Liquid Investments with Maturity of 3 months or Less Such as T-Bills) Dr. Mimi Alciatore 5 Short-Term Investments: Stocks, Bonds Can Easily Sell & Expect to Sell in the Short Term (Within 1 Year) Dr. Mimi Alciatore 6 Amounts Due from Customers That Bought from the Firm on Credit Accounts Receivable
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Dr. Mimi Alciatore 3 Dr. Mimi Alciatore 7 Accounts Receivable Firms Report on the Balance Sheet The Estimated Value of Collectible Accounts Receivables (“A/R”) (Generally < Total A/R) Dr. Mimi Alciatore 8 Accounts Receivable The Firm Must Estimate the Uncollectible Accounts Receivables Or “Bad Debts” Because You Do Not Know the Amount When You Record the Credit Sales Dr. Mimi Alciatore 9 Use an “Allowance for Doubtful Accounts” to Reduce A/R to Amount Expect to Collect The Allowance Account Is Subtracted From the A/R account. The Allowance Is a “Contra-Asset Account”
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Dr. Mimi Alciatore 4 Dr. Mimi Alciatore 10 The Allowance Method Assume: Credit Sales $100,000 Accounts Receivable 12-31-200X 8,000 Allowance for Bad Debts 200 Debit First Approach: Use a % of Credit Sales Example: Assume that, in the past, 3% of Credit Sales have been Uncollectible Dr. Mimi Alciatore 11 The Allowance Method Equity Bad Debt Expense * $3,000 Asset Allowance for Doubtful Accounts $3,000 * Also called “Loss (or Provision) for Bad Debts” In this case, the End-of-the-Period Balance in the Allowance for Doubtful Account Is Ignored . Dr. Mimi Alciatore 12 The Aging Method Estimate Amount of Uncollectible Accounts By Analyzing the Age of : Particular Accounts and/or Groups of Accounts Or Both
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Dr. Mimi Alciatore 5 Dr. Mimi Alciatore 13 The Aging Method AGE - Extent to which an Account Is Past Due The Account is Past Due When It Has Not Been Collected by the End of the Period Specified in the Credit Terms Dr. Mimi Alciatore 14 The Aging Method An A/R Arising from a November 1st Sale With Terms 2/10, net 30 Is Due December 1 st & Is 30 Days Past Due by December 31 st Dr. Mimi Alciatore 15 Aging of Accounts Receivable Schedule Accounts Amount % Expect Amount Expect Receivable To Default To Default Age < 15 days $190,000 .01 (1%) $1,900 16-30 days 40,000 .04 1,600 31-60 days 10,000 .10 1,000 > 61 days 9,000 .30 2,700 Total $249,000 $7,200 Desired Ending Balance for Allowance
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Dr. Mimi Alciatore 6 Dr. Mimi Alciatore 16 If, the Existing Balance in the Allowance Account Had Been a Credit of $5,000 , Then: Allowance for Doubtful Accounts 5,000 Existing Balance 2,200 Adjustment 7,200 Correct Ending Balance Bad Debt Expense 2,200 Equity Allowance for Doubtful Accounts
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This note was uploaded on 04/27/2010 for the course FIN 320f taught by Professor Toprac during the Spring '08 term at University of Texas at Austin.

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1. Accounting for Current Assets - Accounting for Current...

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