Sec 2 - AR - Accounting and Reporting

Question 1

Accounts Receivable (AR)

Definition

Answer 1

Definition

• Accounts receivable (AR) are typically related to customer transactions
• Also called trade receivables
• Represents the _sale of goods or services to a customer on “account”_
• Due in 30 - 90 days
• Does not have an interest element

Example in Exam: Claim against shipper for goods lost in transit

Question 2

Financial Statement Presentation

Answer 2

• Accounts receivable is presented on the balance sheet at net realizable value (NRV)
• The amount of cash that the entity expects to collect at the due date

Question 3

Valuation When Initially Recorded

Answer 3

• Trade discounts- discounts offered for high volume or quantity
• Cash (Sales) discounts- discounts offered for early payment
• Sales returns and allowances- reduction of AR because an item is returned or damaged
• Non-collectible accounts- estimation of uncollectible accounts

Question 4

Recording Methods

Answer 4

• In addition, two different methods of accounting for receivables may be used:

1. the gross method, which records receivables at gross invoice price (before cash discount); and
2. the net method, which records receivables at net invoice price (after cash discount).

Question 5

Gross and Net

Example

Answer 5

Example:
Trade discount and initial recording Sell $2,000 (list price) of goods, terms 3/10, n30. The sale is subject to a 5% trade discount.
Gross Net
Accounts Receivable 1,900 1,843
Sales 1,900* 1,843#

• ****{.95($2,000)}
• *#**{$1,900(.97)}
• The 3/10, n30 terminology indicates that a cash discount of 3% is available to the buyer if payment is remitted within 10 days after the sale. Otherwise, the gross price net of any returns and allowances is due 30 days after the sale.
• The gross invoice price is $1,900, the amount after the trade discount but before the cash discount. The net method records the sale at the gross amount less the 3% cash discount, or 97% of the gross invoice price.

Question 6

Cash (Sales) Discount

Answer 6

• Discounts offered for early payment
• Sales discounts is contra to sales. (gross method)
• Reduces gross sales to sales at its net amount.
• Gross method separately records cash discounts taken by customers

Example:
Payment is received _within the 10-day_ discount period.

Gross Net
Cash 1,843 1,843
Sales Discounts 57
Accounts Receivable 1,900 1,843

Payment is received _after the 10-day_ discount period.
GrossNet
Cash 1,900 1,900
Sales Discounts Forfeited 57
Accounts Receivable 1,900 1,843

• Net method separately records cash discounts not taken by customers.
• Sales discounts forfeited is a miscellaneous revenue account.

Question 7

Uncollectible AR

Answer 7

Uncollectible AR

• Since it is unrealistic to expect all AR will be collected, the entity must estimate the amount that is uncollectible.
• The objective of estimating uncollectible accounts is to:
  
  • Match bad debt expense with revenues
  • State the accounts receivable on the balance sheet at net realizable value
• The allowance account is a contra account to AR

Question 8

Risk of Accounting Loss

Answer 8

• Risk of accounting loss on accounts receivable (credit risk) = Net AR
  
  • This is the risk of loss resulting from not collecting amounts due from sales made on credit.
• Off-balance sheet risk:
  
  • This is the amount of risk of loss that does not show on the balance sheet.

Question 9

Receivables Equation

(cash to accrual)

Answer 9

beg. receivable (cash basis)

+

accrual revenue

-

collections

-

write-offs

=

end. receivable (cash basis)

Question 10

Write-Off Effect on AR

Answer 10

• Write-off of Uncollectible Receivables decreases Net AR balance;

Write-off JE:

Uncollectible Allowance Dr. (contra to AR)

AR Cr.

• Both accounts decrease.