FA C06-07 Receivables

7/27/2019 FA C06-07 Receivables

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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.



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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.


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.



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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.




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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.


Represent claims for which formal instruments of credit areissued as evidence of debt.

Notes Receivable...

2004



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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.


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.



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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.


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.



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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.


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



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Receivables Differ Depending On...

Industry

Time of year

Whether the company extends long-term financing

Credit policies


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.



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Accounts Receivables...

Are reduced as a result of:

Sales discounts

Sales returns and allowances




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Problems with Accounts Receivable

Recognizing accounts receivable. Valuing accounts receivable.

4. Main probCommercial receivables4.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.


2 Methods for Accounting forUncollectible Accounts

The Direct Write-offMethod

The Allowance Method



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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.


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


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.



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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



Cash realizable value 188,000

Current assets

Cash $ 14,800



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.



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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.


Managing Receivables Determine to whom to extend credit.

Establish a payment period.

Monitor collections.

Evaluate receivables balance.

Accelerate cash receipts from

reivables when necessary.



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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.


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.



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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.


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.



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Accelerating Cash Receipts

Waiting for the normal

collection process cost money.


Accelerating Cash Receipts

A bird in the hand is

worth two in the

bush.



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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.


Factor...

Is a finance company or bank that buys receivables from

businesses for a fee and then collects payments directly

from the customers.



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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.


Key point

Valuation methods

Definitionrecognition

Types ofreceivables

Commercialreceivables

Main isues aboutreceivables

receivables

Documents

FA C06-07 Receivables