Types of ReceivablesReceivables: amount due from individuals or companies.Expected to be collected in cashImportant job for any company that sells goods or services on creditOne of any company’s most liquid/largest assetsAmount of company’s receivables as percent of total assets depends on:Its industry, time of year, whether it extends long-term financing, credit policiesReceivable classifications:Accounts receivable: amount customer owes on account; 30-60 days; most significant type of claimNotes Receivable: claim for which formal instruments of credit are issued as evidence of debt; extends 60-90 days longerTrade Receivables: another name for note/account receivable that result from sales transactions.Other receivables: do not result from operations of businessAccounts Receivable2 issues:recognizing accounts receivableValuing accounts receivableThird; accelerating cash receiptsRecognizing Accounts ReceivablesRecord receivable when a service is provided on account or merchandise is sold on accountSome retailers issue own credit cardNot paid within a specific time period (25-30 days) = interestValuing Accounts ReceivableBad Debt expense: an expense account to record losses from extending creditDirect Write-off Method for Uncollectible AccountsReceivables determined to be uncollected = charge to bad debt expenseBad debt expense will show only actual losses; not expected lossesCan reduce usefulness of both income statement and balance sheetNot acceptable for financial reporting purposes:No attempt is made to match bad debt expense with revenueNor does the company show A/R in balance sheet at amount expected to be receivedAllowance Method for Uncollectible AccountsInvolves estimating uncollectible accounts at the end of each periodBetter expense/revenue matchingReceivables stated at cash (net) realizable valueCash (net) realizable value: net amount company expects to receive in cash from receivablesMust use when bad debt expense is material in amount.Steps:Estimate uncollectible accounts receivable; match with revenueRecord as increase (debit) bad debt expense, increase (credit) to allowance for doubtful accountsAFDA is contra account to A/RWriting-off = debit to AFDA credit to A/RBad debt expense = operating expense (selling expense)Use contra account instead of direct write-off because doesn’t know who will pay.Credit card industry; standard practice to write-off after 210 daysWrite-off only affects balance sheetRecovery of an uncollectible accountReverses entry made in writing off accountJournalize collection in usually mannerAffects only balance sheet accountsEstimating the allowanceFrequently estimate allowance as percentage of outstanding receivablesPercentage of receivables basis: method of estimating bad debt expense; establishes percentage relationship between amount of receivables and expected losses from uncollectible accounts.Aging the Account Receivable: schedule of customers balances classified by length of time they have been unpaidTotal estimated uncollectible accounts = required balance in AFDABad debt expense = required balance – existing balanceAFDA might have debit balance; occurs when write-off exceeds balance.Notes ReceivableCompanies may grant credit in exchange for a formal credit instrument; promissory notePromissory note: written promise to pay a specified amount on demand or at a definite timeMay be used:When lending or borrowing moneyWhen amount and credit period exceed normal limitsIn settlement of A/RMaker: party making the promisePayee: party to whom payment is to be madeA/R and N/R can be sold to another partyPromissory notes are negotiable instruments3 basic issues in accounting for notes receivableRecognizingValuingDisposingDetermining the Maturity Date3 ways:on demandon a stated dateat the end of a stated period of timeLife of a note (ex.):Months (3 months):May 1 to August 1 or July 31 to September 30Days:Omit the date the note is issued but include due dateComputing InterestInterest = face value * Annual interest rate * Time in terms of one yearRecognizing Notes ReceivableNote recorded at face valueDebit to notes receivable, credit to A/R or cashDisposing of Notes ReceivableHonored: when maker pays in full at maturity dateAmount due at maturity = face value + interestDishonored note: note that is not paid in full at maturity dateFinancial statement Presentation of ReceivablesShould identify in balance sheet or notes to financial statement each of the major types of receivablesShort-term receivables reported below short-term investmentsBad debt expense recorded under “selling expenses”Interest revenue recorded under “other revenue and gains”Notes are reported above A/R because easily converted to cashManaging ReceivablesInvolves 5 steps:Determine to whom to extend creditEstablish a payment periodMonitor collectionsEvaluate liquidity of receivablesAccelerate cash receipts from receivables when necessaryExtending CreditMany companies increase sales by being generous with sales policy; can be dangerousMonitoring CollectionsMake aging schedule monthlyHelps to estimate timing of future cash flows and info on overall collection experienceAging schedule identifies problem accounts that the company needs to pursue with phone calls, letters, and occasional legal actionConcentration of credit risk: threat of nonpayment from a single customer or many that could affect the company financiallyEvaluating Liquidity of ReceivablesReceivables turnover ratio = net credit sales / net accounts receivableAverage collection period = 365 / receivables turnover ratioCollection period should not exceed credit term periodReceivables turnover ratio might be misleadingCompanies that issue their own credit card want customers to pay later because later means more interestAccelerating Cash ReceiptsNormal collection process cost moneyGetting cash now is better than later or not at allFrequently sells receivables; shortening cash-to-cash operation cycleCaptive finance company: encourage sell of company’s products by assuring financing to buyersOwned by mother companyMight sell because only source of cashBilling and collection are often time-consuming and costlyNational Credit Card SalesEx. Visa and MasterCard3 parties involved in sale:credit card issuer; independentretailercustomernational credit cards = more sales, zero bad debt expense for retailerin exchange pays 2% to 4% of invoice price for servicesales resulting from Visa/MasterCard are cash salesSale of