CH 8_lecture

CH 8_lecture - Chapter 8 Reporting and Interpreting...

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Chapter 8 Reporting and Interpreting Receivables, Bad Debt Expense, and Interest Revenue PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Fred Phillips, Ph.D., CA Edited by: Muriel Anderson, MBA, CPA
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Learning Objective 1 Describe the trade-offs of extending credit. 8-2
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Pros and Cons of Extending Credit Disadvantages 1. Increased wage costs. 2. Bad debt costs. 3. Delayed receipt of cash. Advantage 1. Increases the seller’s revenues. 8-3
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Learning Objective 2 Estimate and report the effects of uncollectible accounts. 8-4
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Record sales on account dr Accounts Receivable cr Sales Revenue Balance Sheet Cash Accounts Receivable Inventory Income Statement Sales Revenue Cost of Goods Sold Gross Profit Accounts Receivable and Bad Debts Jan. 1 8-5
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Record sales on account dr Accounts Receivable cr Sales Revenue Balance Sheet Cash Accounts Receivable Inventory Income Statement Sales Revenue Cost of Goods Sold Gross Profit Balance Sheet (excerpt) Cash Accounts Receivable Less: Allowance for Doubtful Accounts Accounts Receivable, Net Inventory Income Statement (excerpt) Cost of Goods Sold Bad Debt Expense Accounts Receivable and Bad Debts Record estimate of bad debts Jan. 1 Jan. 31 dr Bad Debt Expense (+E, -SE) cr Allowance for Doubtful Accounts (+xA, -A) 8-6
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Record sales on account dr Accounts Receivable cr Sales Revenue Bad debt known Balance Sheet No effect on the net realizable value of Accounts Receivable because the reduction in Accounts Receivable is offset by the reduction in Allowance for Doubtful Accounts. Accounts Receivable and Bad Debts Record estimate of bad debts Jan. 1 Jan. 31 dr Bad Debt Expense (+E, -SE) cr Allowance for Doubtful Accounts (+xA, -A) dr Allowance for Doubtful Accounts (-xA) cr Accounts Receivable(-A) 8-7 Income Statement No effect on net income because bad debt expense was already recorded in the period that the credit sale initially occurred.
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Allowance Method The allowance method follows a two-step process: 1. Make an end-of-period adjustment to record the estimated bad debts in the period credit sales occur. 3. Remove (“write off”) specific customer balances when they are known to be uncollectible . 8-8
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1. Adjust for Estimated Bad Debts Assume that Skechers estimates $900 in bad debts at the end of the accounting period. 1 Analyze 2 Record 8-9 Assets = Liabilities + Stockholders' Equity Allowance for Bad Debt Expense Doubtful Accounts (+E) -900 (+xA) -900 dr Bad Debt Expense (+E) (-SE) 900 cr Allowance for Doubtful Accounts (+xA) (-A) 900
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1. Adjust for Estimated Bad Debts 8-10
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2. Remove (Write-off) Specific Customer Balances (actual bad debt now known) Skechers writes off $800 receivable from Fast Footwear because the company could not pay its account. 1
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CH 8_lecture - Chapter 8 Reporting and Interpreting...

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