fa c06-07 receivables
TRANSCRIPT
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Financial Accounting
Prof. Adriana Tiron Tudor - course
Lect. Szilveszter Fekete - practice
att
Agenda course 6
1. Objectives
2. Receivable definition and classification
3. Commercial receivables
4.Main issues about receivables
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What
receivables represents
are the different categories of riskyreceivable
Notes receivable represent and how they are
reported
1. Objectives
After studying this chapter, you will understand:
How to
record a decrease in the probability ofcollectibility of accounts receivable
accounts receivable are reported
1. Objectives
That their weight in the balance sheet variesaccording to the firms activity
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In most counties of the Western Europe, thepatrimonial assets are presented in the reverseorder of liquidity, as follows:
Non-current assets intangible assets
tangible assets
financial assets
Current assets inventory
receivable short term investments
cash
Regulation assets pre-payments
2. Assets definition and recognision2. Receivable definition and classification
The current assets
Current assets
depending on their concrete form and destinationinside the exploitation cycle, are divided in:
B.1. Inventory and production in progress;
B.2. Receivables or values in process ofreimbursement
B.3. The short term financial investments (theplacements);
B.4. Cash.
2. Receivable definition and classification
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The receivables represent the economic values temporary transmittedby the estate holder (creditor) to other natural or legal persons(debtors) and in the exchange of which he is going to receive anequivalent of value (a sum of money, a good, a work or aservice)
The receivables represent the following structure:
1. The commercial receivables;
2. The social receivables;
3. The fiscal receivables;
4. The receivables related to the associates and affiliates;
5. The other receivables.
2. Receivable definition and classification
1.The commercial receivables
The customers (clients) hold the most important percent (weight) ofthe receivables.
This type of receivables appears after the distribution processdue to the system of non-cash incomings (returns) andpayments.
The goods are delivered, and the services are provided and theworks are billed to the clients, going to be collected afterwards.
Until the collecting of these values is accomplished, the entity hasreceivables over its clients.
2. Receivable definition and classification
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1.The commercial receivables
This type of receivables is generated in generally
by the goods, works and services sale operations.
Are recorded when service is provided or
at point of sale of merchandise on account.
The advance payments advances to suppliers (suppliers-debtors)represent the receivable rights of the patrimonial unit over thegoods, works and services suppliers for the advances and earnestspaid to them.
2. Receivable definition and classification
2. Receivable definition and classification
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1.The commercial receivablesThe receivable bills of exchange
They are assimilated to the clients.
Credit which is extended by use of a formal instrument.
They represent negotiable securities which certify theexistence of a receivable inside the commercial relationsthat can be reimbursed right away or on short term.
They circulate under different names, such as: payables,policies, bills, promissory notes (P.N.) etc.
2. Receivable definition and classification
Represent claims for which formal instruments of credit areissued as evidence of debt.
Notes Receivable...
2004
2. Receivable definition and classification
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Notes Receivable...
Are often accepted from customers whoneed to extend payment of an accountreceivable.
Are often required
from high-risk customers.
MakerIs the party in a promissory note who is making
the promise to pay.
PayeePayeeIs the party to whom payment of a promissorynote is to be made.
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Notes Receivable...
are recorded at facevalue.
are reported at cash (net)realizable value.
are honored when paid infull at maturity.
are dishonored when notpaid in full at maturity.
1.The commercial receivables
Customers invoices to be issued
reflects the value of the delivered goods, theexecuted works and the provided services to theclients for which the invoices were not issued by the
end of the month.
2. Receivable definition and classification
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2. The social receivables
The social receivables are generated by the unitsrelations of reimbursement with the employees andsocial insurance and protection organisms, such as:
Advances to employees;
Other receivables regarding the employees;
Other social receivables.
2. Receivable definition and classification
3. The fiscal receivables
The fiscal receivables represent the units right over the state forthe overpaid taxes (overpaid profit tax), subventions etc.
In accounting these receivables are individualized under thefollowing items:
Overpaid profit tax;
VAT receivable;
Input VAT;
Non-chargeable VAT from buying;
Subventions (subsidies);
Other receivables with the state treasury.
2. Receivable definition and classification
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4. The receivables regarding the group and shareholders
In this category are found:
The capital recharges with shareholders;
The receivables inside the group.
2. Receivable definition and classification
5. The other receivables
The other receivables represent the units rights over the diversedebtors from the sale of the non-current assets, the placement
securities, material damages etc. In the category of the other receivables can also be included the
receivables from sums in process of settlement.
These cant be recorded as other asset elements or as expenses,researches or supplementary explanations being necessary.
Examples:
interest receivable
loans to company officers
advances to employees
income taxes refundable
2. Receivable definition and classification
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Receivables Differ Depending On...
Industry
Time of year
Whether the company extends long-term financing
Credit policies
3. Commercial receivables
Accounts Receivable...
Amounts owed by customers on account. Result from the sale of goods/services. Expected to be collected within 30-60 days.Most significant type of claim held by company. Often called trade receivables.
3. Commercial receivables
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Accounts Receivables...
Are reduced as a result of:
Sales discounts
Sales returns and allowances
3. Commercial receivables
3. Commercial receivables
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Problems with Accounts Receivable
Recognizing accounts receivable. Valuing accounts receivable.
4. Main probCommercial receivables4.Main issues about receivables
4.Main issues about receivables
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Bad Debts Expense...
Is an expense to record estimated uncollectible receivables.
Keeps expenses from being understated on the income
statement and accounts receivables from being
overstated on the balance sheet.
4.Main issues about receivables
2 Methods for Accounting forUncollectible Accounts
The Direct Write-offMethod
The Allowance Method
4.Main issues about receivables
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Direct Write-off Method
Bad debt losses are not estimated. No allowance account is used. Accounts are written off when determined uncollectible as
follows:
Bad Debts Expense 200
Accounts Receivable-- 200
Bad debt expense will show only actual losses.
Accounts receivable will be reported at gross
amount.
4.Main issues about receivables
Allowance Method
Uncollectible accounts receivable are estimated andmatched against sales in the same accounting period inwhich the sales occurred.
Uncollectible accounts receivable may be estimated using:
Percentage of sales
Aging of accounts receivable
3. Commercial receivables4.Main issues about receivables
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X has credit sales of $100.The credit manager estimates $40 willprove uncollectible.
Bad Debts Expense = Allowance for Doubtful Accounts 40
3. Commercial receivables4.Main issues about receivables
Is the net amount expected to be collected in cash.
Excludes amounts the company estimates it will notcollect.
Cash (Net) Realizable Value...
Keeps receivables from being overstated
on the balance sheet.
3. Commercial receivables4.Main issues about receivables
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HAMPTON FURNITUREBalance Sheet (partial)
Current assets
Cash $ 14,800
Accounts receivable $200,000
Less: Allowance for doubtful accounts 12,000
188,000
Cash (net) Realizable Value
The vice president of finance authorizes a write-off of$500 owed by R.A. Ware.
Allowance for Doubtful Accounts 500
Accounts Receivable-Ware 500
Write-off of an Uncollectible Account
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Write-off of an Uncollectible Account
Allowance for Doubtful Accounts 500Accounts Receivable-Ware 500
Accounts Receivable
Allowance for
Doubtful Accounts
Jan 1 Bal 200,000 Mar 1 500
Mar 1 Bal 199,500
Jan 1 Bal 12,000Mar 1 500
Mar 1 Bal 11,500
Current assets
Cash $ 14,800
Accounts receivable $200,000
Less: Allowance for doubtful accounts 12,000
Cash realizable value 188,000
Current assets
Cash $ 14,800
Accounts receivable $199,500
Less: Allowance for doubtful accounts 11,500
188,000
Before Write-off
After Write-off
Cash Realizable Value
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Recovery of an Uncollectible Account
Accounts Receivable-Ware 500Allowance for Doubtful Accounts 500
Cash 500Accounts Receivable 500
Percentage of Receivables...
Management establishes a percentage relationshipbetween the amount of receivables and the expectedlosses from uncollectible accounts.
4.Main issues about receivables
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Aging of Accounts Receivable
The analysis of customer balances by the length of
time they have been unpaid. The longer a debt isoutstanding the less likely it is to be paid.
4.Main issues about receivables
Managing Receivables Determine to whom to extend credit.
Establish a payment period.
Monitor collections.
Evaluate receivables balance.
Accelerate cash receipts from
reivables when necessary.
4.Main issues about receivables
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Payment Period Determine a required payment period and communicate
that policy to customers.
Make sure company's payment period is consistent withthat of competitors.
4.Main issues about receivables
Monitoring Collections Calculate companys credit risk ratio.
Prepare accounts receivable aging schedule at leastmonthly.
Pursue problem accounts with:
phone calls
letters
legal action if necessary.
4.Main issues about receivables
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Concentration of Credit Risk
Is there a threat of nonpayment from a singlecustomer or class of customers that couldadversely affect the financial health of thecompany.
4.Main issues about receivables
Evaluating theReceivables Balance
Liquidity is measured by how quickly certain assets can beconverted into cash.
The receivables turnover ratio measures the number of times,on average, receivables are collected during the period.
4.Main issues about receivables
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Accelerating Cash Receipts
Waiting for the normal
collection process cost money.
4.Main issues about receivables
Accelerating Cash Receipts
A bird in the hand is
worth two in the
bush.
4.Main issues about receivables
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Companies Sell Receivables
They get more sales if they provide financing to customers.
General Motors Acceptance Corporation
Ford Motor Credit Corporation
They may be the only reasonable source of cash.
Billing and collection are often
time-consuming and costly.
4.Main issues about receivables
Factor...
Is a finance company or bank that buys receivables from
businesses for a fee and then collects payments directly
from the customers.
4.Main issues about receivables
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Expense Associated with Selling
Receivables
If a company usually sells its receivables, theservice charge expense is recorded as a sellingexpense.
However, if receivables are sold infrequently thefee may be reported under other expenses and
losses in the income statement.
4.Main issues about receivables
Key point
Valuation methods
Definitionrecognition
Types ofreceivables
Commercialreceivables
Main isues aboutreceivables
receivables