ORIE 3150 September 22 2011 slides

ORIE 3150 September 22 2011 slides - ORIE3150 Accounts...

Info iconThis preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
ORIE 3150 Accounts Receivable September 22, 2011
Background image of page 1

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

View Full DocumentRight Arrow Icon
Accounts Receivable Accounts receivable account is treated as a current asset. We want to be sure to record this asset at its correct value. The value we show on the balance sheet should be the same as the amount of cash we expect to convert it into. It is important to have an accurate figure, as accounts receivable can be quite large for some firms. For example, General Motors has over $20 billion in receivables.
Background image of page 2
Accounts Receivable Using accrual accounting, we recognize sales on account as revenue. Some of these customers will fail to pay. Thus, we have to record some amount each period to recognize this. This amount will be recorded as an expense, a “bad debt expense” This is typically small (like 2% of total sales).
Background image of page 3

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

View Full DocumentRight Arrow Icon
Direct Write Off Method This method is common sense. Using this method, when I learn about an existing Accounts Receivable that I cannot collect upon, I will charge it off as an expense.
Background image of page 4
Direct Writeoff Your company sold an item on account to another company for $20,000 in 2003. You recorded this revenue in 2003. In 2004, you find that this company has gone bankrupt and you reverse this revenue. The Matching Principle has been violated! The revenue is recorded in 2003, the expense in 2004.
Background image of page 5

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

View Full DocumentRight Arrow Icon
Direct Charge-Off Disadvantages: 1. The expense occurs in a different period than does the initial revenue, which violates the matching principle. 2. The direct charge-off method allows firms to manipulate earnings by deciding which customer’s accounts have become uncollectible. 3. The amount on the balance sheet as accounts receivable is not an accurate indication of how much the company plans to collect as cash.
Background image of page 6
Example – Ketola’s Furniture Ketola’s Furniture sells furniture. Customers typically make monthly payments over a period of 36 months. In the first year, 2% of the customers default, in the second year 6% do, and another 4% default in the third year. In its first year of operation, the company sells $800,000 of merchandise on account, and payments of $200,000 are received. Ketola’s finds that its estimates were correct, and that 2% or $16,000 in accounts must be written off.
Background image of page 7

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

View Full DocumentRight Arrow Icon
Ketola’s:  Direct Charge-Off Under the direct charge-off method, Ketola’s writes off 2% of the credit sales, or $16,000, as uncollectible, which reduces the accounts receivable to $584,000 (the $800,000, less $200,000 received,
Background image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 40

ORIE 3150 September 22 2011 slides - ORIE3150 Accounts...

This preview shows document pages 1 - 9. Sign up to view the full document.

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