Chapter 8 - Chapter 8: Receivables Learning Objectives: 1....

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1 Chapter 8: Receivables Learning Objectives: 1. The methods used to estimate uncollectible accounts and the net realizable value of accounts receivable. 2. How firms estimate and record sales returns and allowances. 3. How to evaluate whether or not receivables arose from real sales.
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2 Learning Objectives (contd.) 4. How to impute and record interest when notes receivable have either no implicit interest or unrealistic low interest rate. 5. How companies use receivables to accelerate cash inflows and how the accounting treatment affect the financial ratios. 6. Securitization and off-balance sheet financing.
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3 Receivables Current receivables--Collected within one operating cycle or one year, whichever is longer. Trade receivables : amount owed by customers for goods sold and services rendered as part of normal business operations, including Accounts receivable : receivables arise from credit sales or performing services to customers on account.
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4 Receivables Trade Receivables (contd.): Notes receivable: receivables arise when the seller extends long-term credit to the buyer, who then signs a note. Nontrade Receivables : all others (i.e., interest receivable, advances to employees, deposits to cover potential damages, etc.)
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5 Accounts Receivable Accounts receivable are recorded at face amount to be collected. Management must periodically assess the allowance for uncollectibles. Management has to concern with: Recognition - when Valuation – how Disposition – collected/sell/write-offs
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6 Accounts Receivable :  Recognition and Valuation Recognition: Consistent with revenue recognition criteria. Valuation: Follow conservatism GAAP requires that accounts receivable be reported on the balance sheet at their net realizable value (NRV). NRV is to estimate value of Accounts Receivables to be ultimately collected by the firm .
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7 Accounts receivable: Assessing NRV of Receivables Two amounts must be estimated to determine the NRV of receivables: 1. Uncollectibles —the amount that will not be collected because customers are unable to pay. 2. Returns and allowances —the amount that will not be collected because customers return the merchandise or are allowed a reduction in the amount owed. NRV of receivables Gross amount owned Estimated uncollectibles Estimated returns & allowances = - -
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8 Uncollectible Accounts Describe the accounting treatment of anticipated uncollectible accounts receivable.
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9 Accounts Receivable: Why estimating uncollectibles is important? Most companies establish credit policies by weighing the  following: Expected cost   (e.g. Customer collection and billing costs  plus potential bad debts) of credit sale.
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Chapter 8 - Chapter 8: Receivables Learning Objectives: 1....

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