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MGCR 211 > Chapter 8 > Flashcards

Chapter 8 Flashcards

1
Q

What does receivable mean?

A

Claims that are expected to be collected in cash

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2
Q

What are the two receivables under trade receivables?

A

(1) Accounts receivable

(2) Notes receivable

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3
Q

What is accounts receivable?

A

Amounts owed by the customer from normal business transactions of selling goods or services on credit

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4
Q

What is notes receivable?

A

Claims for which formal credit arrangements between a credtior and a debtor

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5
Q

What are some other receivables (Non-trade receivables)

A

Interest receivable

loans to company officers

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6
Q

What is a bad debt expense?

A

When customers are not expected to pay you, this is considered an expense for the company. It is like the company lost money

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7
Q

How is AR stated?

A

At net realizable value. Meaning, you should record at the amounts you are entitled to receive LESS any expected amount that is uncollectible (AFDA). So net realizable value of AR is AR - allowance for doubtful accounts

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8
Q

What will innfluence amount of uncollectibles?

A

(1) Customer credit (AFDA higher in poorer customers)
(2) Company’s credit policy (AFDA higher if you have generous lax credit policy)
(3) Market conditions (ADFA higher in cases of recession or crisis)

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9
Q

What is AFDA

A

Uncollectible AR in estimation

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10
Q

What was the creit card default rate for Target at the height of the credit crisis?

A

Approximately 10%

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11
Q

Adjusting entries for estimation

A

December 2022 adjusting estimation: (Dr) Bad debt expense (Cr) AFDA (increase)
Next year 2023 write-off run away: (Dr) AFDA (decrease) (Cr) A/R
Year 2075 recovery: (Dr) A/R (Cr) AFDA then (Dr) Cash (Cr) A/R

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12
Q

Which event decreases assets?

A

Estimation

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13
Q

How does each event affect the B/S Equation?

A

Estimation: Decrease in asset, decrease in equity (net AR amount is lower due to an increase in AFDA and bad debt expense will decrease net income amount as well)
Write-off: no change
Recovery: No change

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14
Q

Assume a company uses the allowance method for bad debts. Describe the impact that the write off of a bad debt has on the company’s current ratio

A

No Impact on current ratio

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15
Q

T account for A/R

A

Credit sales account receivable goes up
Cash collection A/R goes down
Write-Off A/R decreases
Recovery A/R increases (left side)

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16
Q

T account for AFDA

A

Write off AFDA decreases
Estimated bad debts AFDA increases
Recovery AFDA increases (right side)

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17
Q

Using AFDA how could a company manage earnings upwards with respect to credit policies?

A

If you liberalize credit policies your AR and revenue is higher. Your AFDA will be higher as well but if you ignore AFDA then bad debt expense will be close to 0. In terms of income if you want higher income you want higher revenue and minimize bad debt expense. To do this you can ignore certain amounts of AFDA. So you can liberalize credits policies and ignore certain amounts of AFDA

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18
Q

What are the two methods to estimate bad debt expense?

A

(1) Percentage of credit sales (I/S approach)

2) Aging of accounts receivable (B/S approach

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19
Q

Corporation made sales on account (i.e., credit sales) for 100,000 in 2012. On average, corporation is unable to collect 5% of their credit sales. What is the bad debt expense in 2012? What entries should corporation make?

A

Bad debt expense = 100,000 * 0.05

Estimation: (Dr) Bad debt expense 5000, (Cr) AFDA 5,000

Write-off: (Dr) NOT DONE

20
Q

On Jan 1, 2019, the company has a credit balance of 10,000 in AFDA> During the year, the company made 5,000 credit sales. And during the year, the company wrote off 2,500 of uncollectible AR. Using % of sales allowance method, the company estimates that 10% of net credit sales become uncollectible. What is the ending balance of AFDA?

A

Bad debt expense increases by 500 dollars and at the same time the company wrote of 2500 worth A/R so as we decrease A/R we also decrease AFDA by same amount so ending balance is 8000. This is because beginning balance is 10,000 + bad debt expense - write off = 8000

21
Q

When is bad debt expense recognized on the income statement?

A

When the uncollectible portion of A/R is estimated

22
Q

Two ways of calculating bad debt expense?

A

(1) % of net sales revenue method

(2) % of accounts receivable method/accounts receivable aging method

23
Q

% of net sales revenue method?

A

If net sale is 100 we have to think about how much is uncollectible. If it is 10% we multiple by 0.1 so 10 dollars is bad debt expense. As long as you know net sales revenue you can multiply percentage for bad debt expense

24
Q

What do you look at in % of accoutns receivable method?

A

Look at ending balance of accounts receivable

25
Q

Example of % of accounts receivable method?

A

If 10% is not collectible we determine end AFDA which is uncollectible A/R in estimation.

26
Q

When is ending AFDA not the same as bad debt expense?

A

If it is the first year, we have same value of ending AFDA and bad debt expense. If you have accounts receivbale from the last year this year and on then we need to think about creating AFDA T accounts

27
Q

What kind of account is AFDA?

A

A contra asset account. Beginning and ending balance are on right hand side (opposite to normal asset side)

28
Q

Adjusting entry for end of fiscal year

A

(Dr) Bad debt expense

(Cr) AFDA

29
Q

The company has credit balance of 5000 in AFDA befire any adjustments at the year-end date. Based on the review of AR aging table, the company determines that 10% if ending AR balance is estimated to be uncollectible. Ending AR balance is 250,000. What amount should the company report as allowance for doubtful accounts on the balance sheet as at the year-end date? What is the bas debt expsne for this year?

A

(1) 250,000 which is end AFDA
(2) Bad debt expense not the same as ending AFDA: unadjusted balance is 5000.
We do ending AFDA - adjusted balance which is 20,000 (250,000*0.1 - 5000)

30
Q

Is it possible to see a debit balance for the unadjusted AFDA balance on the fiscal-year end date?

A

Yes

31
Q

The company has credit balance of 5000 in AFDA befire any adjustments at the year-end date. Based on the review of AR aging table, the company determines that 10% if ending AR balance is estimated to be uncollectible. Ending AR balance is 250,000. What is the AFDA T account for this?

A

Ending AFDA is 25,000

Dr) 5000 (Cr) 30,000 (5,000+25,000

32
Q

On October 31, 2013, the unadjusted balance in the allowance for doubtful accounts is debit 44,000. Assume the company uses the allowance account method for bad debts. The company estimates 3% of total outstanding receivables will not be collected. What is the bad debt expense amount in 2013?

A

Total receivables is 897,000 (given)
ending balance of AFDA is 897 k * 0.03 (3%) = 26910

T-account for AFDA
(Dr) 44,000 (Cr) 44000+26910
(to give an ending balance of 26910)

(Cr) is the bad debt expense so answer is 70,910

33
Q

How do you get AFDA from total A/R?

A

from each category look at A/R and multiply by uncollectible percentage and add it all up. this gives ending balance of AFDA.

34
Q

What is accounts receivable factoring?

A

Sale of A/R. Once you sell product on account you do not want to wait for cash collection from customers. You can sell the A/R to debt collection agency. If you do this, when you sell A/R it goes down but you do not get entire cash amount. You have a loss or expense referred to as service charge expense

35
Q

Sale of receivables adjusting balance?

A

(Dr) Cash, Service charge expense

(Cr) Accounts receivable

36
Q

How does financial crisis in banking industry affect manufacturing businesses directly?

A

Manufacturers find it difficult to do factoring for their receivables so when they face short-term liquidity problems, they will become insolvent despite prospective outlooks

37
Q

What is notes receivable?

A

The right to receieve cash from the borrower. They often have an interest component

38
Q

Formula for calculating interest?

A

Face value of note X annual itnerest rate X time in terms of one year

39
Q

An interest rate is always annual. True or False?

A

True

40
Q

A/R turnover ratio equation?

A

Net credit sales/average gross A/R

41
Q

Average collection period/Days in A/R equation?

A

365/A/R turnover

42
Q

What is the A/R turnover ratio?

A

Shows the number of times the A/R are renewed every year

43
Q

What is average collection period?

A

Measures how long it takes to collect cash from custoemrs regarding previous credit sales

44
Q

Suppose that the beginning and ending balances of Gross A/R are 100 during the year. Two cash collection transactions take place on April 1 and October 1 for the A/R value of 100 in each event. At the end of each cash collection event, the company made 100 net credit sales
Compute the A/R turnover ratio

A

On Apr 1 net credit sales is 100 (so in A.R
on Oct 1 net credit sales increases by 100 so ending gross A/R is 100.
We have credit sales 2 times

2*100/(100+100)/2 = 2

45
Q

Which A/R turnover ration might indicate that (1) the company is having difficulty collecting money from customers or (2) the company has very generous credit terms with them

A

(1) Lower A/R turnover ratio (=high average collection period for A/R so it takes longer to collect cash from customers i.e., company has hard time collecting cash from customers)
(2) Low A/R turnover ratio

46
Q

The company estimates bad debt expense at 1.4% of credit sales and uses the allowance account method for bad debts. The average accounts receivable collection period during 2013 was 73 days and total receivables averaged 920,500 for the year. The assistant was unable to compute the 2013 bad debt expense. What is the correct amount of bad debts expense for 2013?

A

Average collection period for accounts recievables = 365/A/R turnover. Average collection period = 73 so we can figure out that A/R turnover is 5.
Multiply 5 by average gross account receivable number and then multiple this by 1.4%

Gives 64,435

MGCR 211 (19 decks)

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