Chapter 8 Flashcards
What is a recievable?
Claims that are expected to be collected in cash
What are accounts recievable?
Amounts owed by the customer from normal business transactions of selling goods or services on credit
What are notes receivable?
Claims for which formal credit arrangements between a creditor and a debtor
What is bad debt expense?
When customers are not expected to pay you
Journal entry for A/R valuation?
(Dr) Bad debt expense
Cr) AFDA (allowance for doubtful account
What iss AFDA?
Contra AR account. This records the bad debt at the time of the sale based on an estimated percentage of uncollectibility
Where is AR stated at?
Net realizable value
Equation for net realizable value?
AR - allowance for doubtful accounts
What will influence the amount uncollectible?
- customer credit
- company’s credit policy
- market conditions
If a company’ credit policy to its customers is very lax (not very strict at all), then AFDA is higher or lower under the assumption that all else is equal?
Higher
Three steps for account receivable?
Estimation
Write-off
Recovery
Journal entry for estimation
(Dr) Bad debt expense
(Cr) Allowance for doubtful accounts
Journal entry for write-off?
(Dr) Allowanfs for doubtful accounts
(Cr) A/R
Journal Entry for Recovery
(Dr) A/R
(Cr) allowance for doubtful accounts
(Dr) Cash
(Cr) A/R
Which account receivable event decreases assets?
Estimation
How does estimation affect B/S equation?
Decreases assets Decreases eqioty (net AR is lower due to increase in AFDA and bad debt expense will decrease net income amount as well)
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?
No impact on the current ratio
T-Account for A/R
(Dr) beginnign balance Credit sales, recovery = reinstatement
(Cr) Cash collection, write-off
(ending balance on Dr)
T-Account for AFDA?
(Dr) Write off debts
(Cr) Beginning balance, estimated bad debts, recovery = reinstatements
(ending balance on Cr)
What does AFDA represent?
The estimated amount of the future losses that you will incur when you realize that the AR are uncollectible.
Using AFDA how could a company manage earnings upwards with respect to credit policies?
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
What are the two methods to estimate bad debt expenses?
(1) Percentage of credit sales (I/S approach)
2) Aging of accounts receivable (B/S approach
How to collect bad debt expense using percentage of credit sales?
Bad debt expense = net credit sales * uncollectible %
Equation for ending balance of AFDA?
Ending balance = beginning balance + bad debt estimation - write off
How to calculate amount compay should report as allowance for doubtful accounts using aging methods example
Ending AR balance * percentage of ending AR estimated to be uncollectible
Bad debt expense is above calculation - credit balance of AFDA (or plus debit balance)
Is it possible to see a debit balance for the unadjusted
AFDA balance on the fiscal-year end date?
Yes
Journal entry for sales of receivables (factoring)
(Dr) Cash, Service charge expense
(Cr) AR
Difference between notes receivable and accounts receivable?
Notes more formal and for a longer period of time and often have an interest component
Formula for calculating interest?
Face value of note * annual interest rate * time in terms of one year = interest
A/R turnover ratio equation
net credit sales/average gross A/R
Average gross A/R =
Equation for average collection period?
Days in A/R = 365/AR turnover
What does a lower A/R turnover ratio tell you
(1) Company is having difficulty collecting money from customers or
(2) The company has very generous credit terms with them
