Module06 - Module 6 Reporting and Analyzing Operating...

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Module 6 Reporting and Analyzing Operating Assets Roadmap Recognition Measurement Exit Analysis A/R Credit Sales 1.earned 2.realizable Net Realizable value 1.Bad debts 2.Allowance Estimation 1.Cash paid 2.Written off 1.A/R Turnover 2.Average Collection period Inventory 1.Acquisition of Goods 2.Manufacturing Raw Materials Work in process Cost of Goods M’fred Lower of Cost or Market Cost [FIFO, LIFO, Average] Market increase COGS and decrease inventory Estimation 1.Sold (COGS) 2.Conversion (R/M and WIP) 1.Inventory Turnover 2.Days Inventory Outstanding 3.Gross Profit margin PPE 1.Acquisition 2.Construction 1. Historical cost less Acc Depreciation [Depreciation expense and contra asset] 2. Impairment Estimation 1.Fully depreciated 2.Sold or exchanged 1.PPE Turnover 2. Estimated Useful life 3.percent used up Accounts Receivable ± Arise as a result of sales on credit (or sales on account). ± Accounts receivable are reported on the balance sheet of the seller at net realizable value , which is the net amount the seller expects to collect.
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Cisco Systems, Inc. Current Assets Note: Cisco’s Accounts Receivable are reported net of a $175 million allowance for uncollectible accounts. Allowance for Uncollectible Accounts ± The amount of expected uncollectible accounts is usually computed based on an aging analysis . ± Each customer’s account balance is categorized by the number of days or months the underlying invoices have remained outstanding. ± Based on prior experience or on other available statistics, bad debts percentages are applied to each of these categorized amounts, with larger percentages being applied to older accounts. Aging Analysis Example ± GAAP requires companies to disclose the amount of the allowance for uncollectible accounts, either on the face of the balance sheet or in the notes. ± Companies are also required to disclose their accounting policies with respect to receivables.
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Reporting Accounts Receivable Given our gross balance of $100,000 and estimated uncollectible accounts of $2,900, accounts receivable will be reported as follows: 3M’s Current Assets Bad Debt Expense ± Bad Debt Expense is equal to the increase in the allowance for uncollectible accounts. ± In our previous example, if a previous balance of $2,200 existed in the allowance for uncollectible accounts, the company would record a bad debt expense of $700.
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Write-off of Uncollectible Accounts ± The write-off of an uncollectible account does not affect income. The amount written-off is reflected as a reduction of the account receivable balance and the allowance for uncollectible accounts: Cisco’s Receivable Footnote Cisco’s Allowance for Doubtful Accounts Footnote
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Income Shifting ± By underestimating the provision, expense is reduced in the income statement, thus increasing current period income. ± In one or more future periods, when write-offs occur
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This note was uploaded on 05/12/2010 for the course ACG 5065 taught by Professor Asare during the Spring '08 term at University of Florida.

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Module06 - Module 6 Reporting and Analyzing Operating...

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