Handout_06_(APSCW_-_F2009)

Handout_06_(APSCW_-_F2009) - FINANCIALACCOUNTING...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
BUSI W3013 Handout 06 | Page 1 F INANCIAL A CCOUNTING BUSI W3013 | F ALL 2009 H ANDOUT 06 PROFESSOR ANDREW SCHMIDT 1.0 Introduction ……………………………… 2 2.0 Bad Debt Expense ……………………………… 2 3.0 Sales Returns and Allowances ……………………………… 7 4.0 Accounts Receivable and the Statement of Cash Flows ……………………………… 8 5.0. Financial Statement Analysis of Accounts Receivable ……………………………… 10 6.0. Disclosure Requirements ……………………………… 12 7.0 Practice Exercises and Solutions ……………………………… 17 8.0 Problem Set 05 ……………………………… 43 Appendix ……………………………… 49 H ANDOUT O BJECTIVES : A CCOUNTS R ECEIVABLE (AR) 1) Understand the different methods of accounting for bad debts. 2) Understand how AR are presented and valued in the financial statements. 3) Explain how sales returns and allowances are recorded and reported in the financial statements. 4) Understand the different types of questions that can be answered by analyzing AR. Kramer: It's a write-off for them. Jerry: How is it a write-off? Kramer: They just write it off. Jerry: Write it off what? Kramer: Jerry, all these big companies, they write off everything. Jerry: You don't even know what a write-off is. Kramer: Do you? Jerry: No. I Don't. Kramer: But they do . . . and they're the ones writing it off. - S e i n f e l d
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
BUSI W3013 Handout 06 | Page 2 1.0. I NTRODUCTION GAAP stipulates that accounts receivable be reported in the balance sheet at their net realizable value (NRV) . 1 Two things must be estimated to determine the NRV of receivables: 1) The amount that will not be collected because customers are unable to pay ( bad debts ). 2) The amount that will not be collected because customers return the merchandise for credit or are allowed a reduction in the amount owed ( sales returns and allowances ). 2.0. B AD D EBT E XPENSE Firms that sell on credit typically do not collect all accounts. Thus, they recognize an expense, called the bad debt expense , which measures the asset loss associated with uncollectible accounts. There are two methods for recognizing the bad debt expense: the direct write-off method and the allowance method. 2.1. The Direct Write-off Method The direct write-off method is very simple. When specific accounts are identified as uncollectible, the bad debt expense is increased (debited) and AR is reduced (credited) for the amount identified as uncollectible. Assets = Liabilities + CC + RE D+[C–] D–[C+] D–[C+] D–[C+] Bad Debt Exp AR –100 –100 When collection is made on a receivable that was previously written-off, cash is increased (debited) and the bad debt expense is reduced (credited). Assets = Liabilities + CC + RE D+[C–] D–[C+] D–[C+] D–[C+] Cash Bad Debt Exp +100 +100 1 NRV means the selling price of an item minus reasonable further costs both to make the item ready to sell and to sell it. When applied to accounts receivable, NRV means the amount of money the business can reasonably expect to collect from its customers.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 52

Handout_06_(APSCW_-_F2009) - FINANCIALACCOUNTING...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online