Short Term Liquid Assets

1
Chapter 9

• Short Term Liquid Assets
• (And Then Some)

2
Accounts Receivable

• If company cant wait to collect Accounts
  Receivable they can sell them - factoring
• without recourse factor (buyer) carries risk of
  uncollectability
• with recourse factor is reimbursed for any
  uncollectable account by seller
• contingent liability of seller must be disclosed
• factor buys at less than face value based upon
  risk
• with recourse smaller fee - less risk
• With recourse potentially puts more money in
  sellers pocket than without recourse

3
Accounts Receivable

• If retained by company, risk that some accounts
  wont be collected
• Expense that recognizes this is called
• Uncollectable Accounts Expense
• Bad Debts Expense
• Two methods for handling bad debts expense
• direct charge off method
• allowance method

4
Direct Charge-Off Method

• When account determined to be uncollectable
• Bad Debts Expense xxx Accounts
  Receivable xxx
• Simple
• Required for income tax purposes
• only after all events test met
• Its NOT GAAP
• does not match expense to period sales were in

5
Accounts Receivable - GAAP

• If carried by the company need to be reported on
  balance sheet at their Net Realizable Value
• estimate of the amount of money that will
  actually be brought in
• Accounts Receivable reduced by a contra account
• Allowance for Doubtful Accounts

6
Allowance Method

• GAAP
• Attempts to match Bad Debt Expense to the period
  in which the sales originated and were recognized
• Is an estimate, but needs to be realistic
• Two common methods for estimating Bad Debts
  Expense
• Percentage of Net Sales Method
• Accounts Receivable Aging Method

7
Percentage of Net Sales Method

• Income Statement (Method) driven
• Direct match between Net Sales for period and Bad
  Debts Expense
• Gets the Income Statement expense right, but lets
  the balance sheet amount float
• Generally some historical percentage applied to
  current years net sales

8
Percentage of Net Sales Method
SourceExcel/AC 205 Classes/Chapter 9 Allow
Doubt Accts.XLS
9
Percentage of Net Sales Method
SourceExcel/AC 205 Classes/Chapter 9 Allow
Doubt Accts.XLS
10
Accounts Receivable Aging Method

• Balance Sheet (Method) driven
• Estimates the amount of period end Accounts
  Receivable that will not get collected
• Gets the Balance Sheet allowance right, but lets
  the Bad Debt Expense on the Income Statement
  float
• Generally historical percentages applied to aging
  of Accounts Receivable

11
Accounts Receivable Aging Method
SourceExcel/AC 205 Classes/Chapter 9 Allow
Doubt Accts.XLS
12
Allowance Method Allowance account has a
credit balance before adjustment
SourceExcel/AC 205 Classes/Chapter 9 Allow
Doubt Accts.XLS
13
Allowance Method Allowance account has a
debit balance before adjustment
SourceExcel/AC 205 Classes/Chapter 9 Allow
Doubt Accts.XLS
14
Writing Off an Account

• Write offs go against the allowance account
• previously charged operations with Bad Debt
  Expense when allowance was adjusted
• Allowance for Doubtful Accounts xxx
• Accounts Receivable xxx
• This is how allowance account can end up with a
  debit balance before current adjustment
• write offs exceed prior allowance balance

15
Recovery of Previously Written Off Account

• Reinstate Accounts Receivable and Allowance
  (Reverse write off entry)
• Accounts Receivable xxx
• Allowance for Doubtful Accounts xxx
• Record collection of cash
• Cash xxx
• Accounts Receivable xxx

16
Ratio Analysis

• Accounts Receivable Turnover
• Net Credit Sales Average Net Accounts
  Receivable
• Average Days Sales Uncollected (Age of
  Receivables
• 365 Days Accounts Receivable
  Turnover

17
Notes Receivable

• See pages 405 to 409
• Im leaving that part up to you