Lecture 11 Flashcards
increase in allowance for bad debt
reflect new periodic estimations of default that lowers the period’s NI, by increasing bad debt exp
decrease in allowance for bad debt
reflect result from PERMANENT write-offs of particular account receivables
DOES NOT flow to bad debt exp, since the exp was already taken when the original estimate was made
ending balance AFDA =
BB AFDA + Bad debt exp - write-offs
effect of a write-off on net assets
no effect
effect of a write-off on net income
no effect
effect of recording bad debt expense on net assets
decrease
increase in the allowance, decrease in net assets
effect of recording bad debt expense on net income
decrease
increase in an expense, decrease in net income
AR turnover =
Credit sales / Ave AR
measures how rapidly collections occur
ave AR =
(beg AR + end AR) / 2
days to collect AR =
365 / AR turnover
measures how many days it takes to collect
should company take cash discount?
YES, if they can borrow for less than implicit interest rate
ex. if 2/10, n/30
firm is being charged $2 on principal of $98 to use cash for another 20 days
interest = (2/98) * (365/20) = 37%
