Receivables - Receivables RCJChapter8(except405412)...

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Receivables RCJ Chapter 8 (except  405-412)
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Paul Zarowin 2 key Issues 1. How receivables are used to raise cash 2. Recourse vs. non-recourse sales 3. Consequences of different methods on financial  statements 4. Role of receivables in earnings management 
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Paul Zarowin 3 Allowance Method 1. Sales DR   A/R                CR   Credit sales revenue 2. Collections DR   Cash                CR   A/R 3. Write-off’s  DR   AUA (or ADA)                CR   A/R Adjusting entry: 4. Bad debts expense DR   Bad debt expense                CR   AUA (or ADA)
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Paul Zarowin 4 A/R Beginning Balance (+) Credit sales revenue (-)  Write-offs    (-) Collections Ending Balance Allowance of Uncollectable Accounts  (AUA) Beginning Balance (-) Writeoffs (+) Bad debt exp. Ending Balance Allowance Method (cont’d) ex. C8-1, parts 1, 6, & 7
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Paul Zarowin 5  Using  A/R to Raise Cash  Sometimes companies have need to accelerate cash collections: A. Immediate cash needs B. Credit sales: the company is unwilling/unable to bear the cost of processing and  collections of credit C. Imbalance in the cash cycle: days for payable (to suppliers) is shorter than days for  receivables (from customers) D. Loan covenants may preclude the company from borrowings In such instances companies can use their A/R to raise cash: Assignment:   Collateralized borrowing (A/R used as collateral)   Factoring:   Sale of Receivables 
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Paul Zarowin 6 Using  A/R to Raise Cash: J.E.  1. Assignment: collateralized borrowing DR   Cash DR Finance charge/Interest expense CR Liability 2. Factoring: sale of receivable DR Cash DR Loss * CR A/R (*) can be gain (CR) if cash > A/R, but unlikely Note : different effects on assets vs. liabilities  
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Paul Zarowin 7 Recourse vs. Non-Recourse Is transaction a sale or a borrowing? Who bears risk of loss? How does this affect price  of A/R?  Recourse:   seller/borrower must buy back  defaulted A/R from buyer/ lender.  Non- Recourse:   buyer/lender must keep defaulted  A/R.  The conditions are specified in RCJ, page 400
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Paul Zarowin 8 3 Possible Cases 1. Recognize a loss and a 
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This note was uploaded on 02/28/2012 for the course BUSINESS 101 taught by Professor Smith during the Spring '08 term at UCLA.

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Receivables - Receivables RCJChapter8(except405412)...

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