Professional Documents
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Needles Ch07
Needles Ch07
Needles Ch07
72
Cash Considerations
Most liquid of all assets Central to operating cycle Consists of: Currency and coins on hand Checks and money orders from customers Deposits in checking and savings accounts
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Cash may include a compensating balancea minimum amount required by a bank for a creditgranting agreement.
73
Cash Requirements
Seasonal Cycles and Cash Requirements for a Manufacturer of Athletic Sportswear
74
Credit Policies
To increase the likelihood of selling to customers who will pay on time, companies develop control procedures and maintain a credit department
The credit department: Examines the financial resources and debts of the credit applicant Asks for personal references Gets credit rating from credit bureaus Determines the extent to which the company can grant credit, if any
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75
Receivable Turnover
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Receivable Turnover
Reflects the relative size of a companys accounts receivable and the success of its credit and collection policies Net Sales Receivable Turnover = Average Net Accounts Receivable
(Amounts in Millions)
= =
79
Financing Receivables
Money tied up in receivables is something that many companies seek to avoid Companies may use one or more of these methods so that they can receive cash faster: Set up a separate finance company
Ford Ford Motor Credit Company GM General Motors Acceptance Corp. Sears Sears Roebuck Acceptance Corp.
Factor A/R
Sale or transfer of A/R; the buyer may bear risk of collection (factoring without recourse) or the seller may bear risk of collection (factoring with recourse)
710
711
Factoring Details
What fees are charged? Typically 2% of total A/R for sales with recourse; Higher fee for sales without recourse
Reports a contingent liability (a potential debt that can develop if customers dont pay receivables)
712
Securitization
A company may sell a group of receivables in a batch at a discount to another company or to investors
When receivables are paid, buyer gets full amount, thus their profit depends on the amount of discount they negotiated
Circuit City Sells its receivables without recourse, so it has no further liability even if customers do not pay
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713
Discounting
The sale of promissory notes held as notes receivable
Company A Holds $10,000 note payable to Company B; Note will pay $600 in interest Company A should disclose the contingent liability (in the amount of note plus interest) in notes to its financial statements
Copyright Houghton Mifflin Company. All rights reserved.
Bank Buys the note for $9,600 If Company B pays, bank will receive $10,600 and realize a $1,000 profit If Company B defaults, Company A is liable for the note
714
Estimating Uncollectibles
Match these expenses There will always be of selling on credit to customers who do not the revenues they help pay their accounts, generate called uncollectible accounts, or bad debts
Estimate the uncollectible expense in the fiscal year in which the sales are made
715
716
717
Cash Equivalents
Investments like time deposits or certificates of deposit (CDs) that have a term of 90 days or less
718
719
Tax law requires use of this method when computing taxable income
XXX XXX
Most companies do not use this method for financial reporting purposes because it does not conform to GAAP.
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720
At the time of sale, management cannot identify which customers will not pay To observe the matching rule, losses from uncollectible accounts must be estimated The estimate becomes an expense in the fiscal year in which the sales are made
Copyright Houghton Mifflin Company. All rights reserved.
721
722
The percentage amount is ususally based on the companys historic losses It ignores the difference between last years estimated losses and the actual losses incurred during the year
724
After the above entry is posted, Allowance for Uncollectible Accounts will have a credit balance of $15,600
How much of the ending balance of accounts receivable will not be collected?
The difference between the amount determined to be uncollectible and the actual balance of Allowance for Uncollectible Accounts is the expense for the period.
726
GM1
The total past due for each category is multiplied by the estimated percentage uncollectible The sum of the totals for each category is the estimated balance of Allowance for Uncollectible Accounts
Notice that the estimated percentage uncollectible increases as accounts become further past due.
727
Slide 27 GM1 Insert Exhibit 1, chapter 7, Financial Accounting,8e, Needles,titled "Analysis of Accounts REceivable by Age" Without the exhibit, it is difficult for me to tell where the two boxes should be placed on the slide. Please palce boxes where appropriate Order of appearance: 1. Exhibit 2. Box - Bullets, no background or outline 3. Box - Ornage and outlined
Gail Mestas, 10/23/2002
A credit adjustment of $1,659 will bring the account to its target balance
1,659 1,659
ncollectible Accounts pense Allowance for ncollectible Accounts To bring the allowance for uncollectible accounts to the level of estimated losses
728
800
Dec. 31 adj. Dec. 31 bal.
3,259 2,459
A credit adjustment of $3,259 will bring the account to its target balance
3,259 3,259
ncollectible Accounts pense Allowance for ncollectible Accounts To bring the allowance for uncollectible accounts to the level of estimated losses
729
730
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The uncollectible amount was already accounted for as an expense when the allowance was established
Copyright Houghton Mifflin Company. All rights reserved.
732
Accounts Receivable
Dec. 31
2,459 2,209
44,400
Jan. 15
250
Bal. Bal.
250
44,150
The write-off does not affect the estimated net realizable value of accounts receivable
Net realizable value of A/R Before write-off $44,400 $2,459 = $41,941 After write-off $44,150 $2,209 = $41,941
733
All promissory notes that the payee holds that are due in less than one year are categorized as notes receivable in the current assets section of the balance sheet
734
A Promissory Note
735