PDF_PP_Slides_06_(APSCW_-_F2009)

PDF_PP_Slides_06_(APSCW_-_F2009) - 10/22/2009 Handout06,p.1

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10/22/2009 1 Objectives: Handout 06 Handout 06, p. 1 ± Understand the different methods of accounting for bad debts. ± Understand how AR are presented and valued in the financial statements. ± Explain how sales returns and allowances are recorded and reported in the financial statements. ± Understand the different types of questions that can be answered by analyzing AR. Accounts Receivable ± Accounts Receivable are reported at Net Realizable Value (NRV), which represents the amount expected to be Handout 06, p. 2 received in cash. ± 2 things must be to arrive at NRV: ± Uncollectible Accounts ± Sales Returns and Allowances ESTIMATED NRV of AR = Gross AR – E( Uncollectibles + Returns & Allowances)
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10/22/2009 2 Accounts Receivable ± Firms that sell on credit typically do not collect all accounts. Handout 06, p. 2 ± Therefore, firms must recognize a bad debt expense, which measures the asset loss associated with the uncollectible accounts. There are 2 methods for recognizing bad debt expense (BDE). ± The Direct Write Off Method ± The Allowance Method Bad Debt Expense ± The Direct Write Off Method Handout 06, p. 2 Specific Accounts are Identified as Uncollectible Assets = Liabilities + CC + RE D+[C–] D–[C+] D–[C+] D–[C+] Bad Debt Exp AR –$100 –$100 Collect an Account that was Previously Written Off Assets = Liabilities + CC + RE D+[C–] D–[C+] D–[C+] D–[C+] Cash Bad Debt Exp +$100 +$100
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10/22/2009 3 Bad Debt Expense ± The Direct Write Off Method Handout 06, p. 3 ± Non GAAP method!!! ± Results in poor matching of revenues and expenses (Accounts are often identified as uncollectible only in periods after the sale is recorded). ± Some bad debts that relate to current period income will be expensed in future periods. ± Current period BDE includes write offs of accounts created (i.e., sales recognized) in prior periods. Bad Debt Expense ± The Allowance Method Handout 06, p. 3 ± BDE includes both actual and expected write offs associated with current period revenue. ± Income Statement Approach ± Balance Sheet Approach
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10/22/2009 4 Bad Debt Expense ± The Allowance Method: Income Statement Approach Handout 06, p. 3 ± BDE is calculated directly by multiplying credit sales by a percentage that represents management’s estimate of the proportion of credit sales that will never be collected. ± The percentage is determined by considering the firm’s past experience, industry experience, and other factors (e.g., macroeconomic conditions) Bad Debt Expense ± The Allowance Method: Balance Sheet Approach Handout 06, p. 3 ± Step 1 : Estimate the required level (i.e., ending balance) of the allowance for uncollectible accounts (a contra asset to AR). ± Step 2 : BDE = EB of the allowance–the existing balance of the allowance prior to recording BDE.
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PDF_PP_Slides_06_(APSCW_-_F2009) - 10/22/2009 Handout06,p.1

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