Debtors turnover ratio final

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<ul><li> 1. Meena Gorandle Financial Management, ITM Institute of Management DEBTORS TURNOVERDEBTORS TURNOVER RATIORATIO </li> <li> 2. Financing </li> <li> 3. Cash Considerations Consists of: Currency and coins on hand Most liquid of all assets Central to operating cycle Checks and money orders from customers Deposits in checking and savings accounts Cash may include a compensating balancea minimum amount required by a bank for a credit- granting agreement. </li> <li> 4. Credit Policies 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 To increase the likelihood of selling to customers who will pay on time, companies develop control procedures and maintain a credit department </li> <li> 5. How Factoring Works </li> <li> 6. Assessing Management of Receivables Accounts Receivable Turnover--A measure used to determine a companys average collection period for receivables. Computed by dividing net sales (credit sales) by average accounts receivables. </li> <li> 7. Accounts Receivable Turnover Number of Days in Receivables--A measure of the average number of days it takes to collect a credit sale. It is computed by dividing 365 days by the accounts receivable turnover. Assessing Management of Receivables </li> <li> 8. The Wheeler Company had Net Credit Sales of $150,000 during 2009. The accounts receivables increased $5,000 to $40,000 during the same time. Calculate the Accounts Receivable Turnover and Number of Days in Receivables. Accounts Receivable Turnover: Net Sales $150,000 = 4.0 Average Accounts Receivable $ 37,500 Example </li> <li> 9. Number of Days in Receivables: Number of Days 365 = 91.25 Accounts Receivable Turnover 4.0 The Wheeler Company had Net Credit Sales of $150,000 during 2009. The accounts receivables increased $5,000 to $40,000 during the same time. Calculate the Accounts Receivable Turnover and Number of Days in Receivables. Example </li> <li> 10. Evaluating the Level of Accounts Receivable How many times, on average, does a company turn its receivables into cash during an accounting period? How long, on average, does it take a company to collect its accounts receivables? Receivable Turnover Days Sales Uncollected </li> <li> 11. Estimating Uncollectibles There will always be customers who do not pay their accounts, called uncollectible accounts, or bad debts Match these expenses of selling on credit to the revenues they help generate Estimate the uncollectible expense in the fiscal year in which the sales are made </li> <li> 12. Alternate Account Names Allowance for Uncollectible Accounts Uncollectible Accounts Expense Allowance for Doubtful Accounts Allowance for Bad Debts Bad Debts Expense </li> <li> 13. Estimating Uncollectible Accounts Estimated loss should be: Realistic Based on objective information Based on past experience Based on current economic conditions Two commonly used methods for estimating loss 1. Percentage of net sales method 2. Accounts receivable aging method </li> <li> 14. Percentage of Net Sales Method How much of this years net sales will not be collected? The answer determines the amount of uncollectible accounts expense for the year The percentage amount is usually based on the companys historic losses It ignores the difference between last years estimated losses and the actual losses incurred during the year </li> <li> 15. Dec. 31, 2013: Account balances: Sales, $645,000; Sales Returns and Allowances, $40,000; Sales Discounts, $5,000; Allowance for Uncollectible Accounts, $3,600. Management estimates that uncollectible accounts will average about 2 percent of net sales. $12,000$5,000)$40,000($645,000x.02expenseaccountsbleUncollecti == Allowance for Uncollectible Accounts Dec. 31 3,600 Dec. 31 adj. 12,000 Dec 31 bal. 15,600 Percentage of Net Sales Method After the above entry is posted, Allowance for Uncollectible Accounts will have a credit balance of $15,600 Dec. 31 Uncollectible Accounts Expense 12,000 Allowance for Uncollectible Accounts 12,000 To record the uncollectible accounts expense at 2 percent of $600,000 net sales </li> <li> 16. Accounts Receivable Aging Method How much of the ending balance of accounts receivable will not be collected? The ending balance of Allowance for Uncollectible Accounts is determined directly through an analysis of accounts receivable The difference between the amount determined to be uncollectible and the actual balance of Allowance for Uncollectible Accounts is the expense for the period. </li> <li> 17. Accounts Receivable Aging Method Dec. 31, 20x6: Management has estimated that $2,459 of Accounts Receivable are uncollectible. Allowance for Uncollectible Accounts has a debit balance of $800. Allowance for Uncollectible Accounts A credit adjustment of $3,259 will bring the account to its target balance Dec. 31. 800 Dec. 31 adj. 3,259 Dec. 31 bal. 2,459 The target balance for the account is $2,459 Dec. 31 Uncollectible Accounts Expense 3,259 Allowance for Uncollectible Accounts 3,259 To bring the allowance for uncollectible accounts to the level of estimated losses </li> <li> 18. Estimates Differ from Write-Offs? Accounts receivable written off during a period will rarely equal the estimated uncollectible amount Shows a credit balance when the total of accounts written off is less than the estimated uncollectible amount Shows a debit balance when the total of accounts written off is greater than the estimated uncollectible amount Allowance for Uncollectible Accounts </li> <li> 19. 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 Borrow money and pledge A/R In case of default on loan, A/R (collateral) can be taken and converted to cash to satisfy the loan 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) Ford Ford Motor Credit Company GM General Motors Acceptance Corp. Sears Sears Roebuck Acceptance Corp. </li> <li> 20. 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 </li> <li> 21. 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 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 Company A should disclose the contingent liability (in the amount of note plus interest) in notes to its financial statements Bank Buys the note for $9,600 </li> <li> 22. Notes Receivable A written promise that allows someone to pay a certain amount of money on or before a specific future date. Notes are classified as current or long- term assets, depending on the due date. </li> <li> 23. Key Components of Promissory Notes Total proceeds of a note at maturity date (face value plus interest) Maturity Value Cost of borrowing money or the return for lending money, usually stated on an annual basis Interest and Interest Rate Length of time in days between the notes issue date and its maturity date Duration Date on which the note must be paidMaturity Date </li> <li> 24. Computing Interest PrincipalPrincipal (amount)(amount) </li> <li> 25. PrincipalPrincipal (amount)(amount) InterestInterest Rate (%)Rate (%) X Computing Interest </li> <li> 26. PrincipalPrincipal (amount)(amount) InterestInterest Rate (%)Rate (%) TimeTime (years)(years) X X Computing Interest </li> <li> 27. PrincipalPrincipal (amount)(amount) InterestInterest Rate (%)Rate (%) TimeTime (years)(years) InterestInterest OwedOwed X X Equals Computing Interest </li> <li> 28. Example: Interest The ABC Company signed a 90-day, $5,000 note payable to the XYZ Company in settlement of existing accounts payable. The interest rate of the agreement is 14 percent. Calculate the interest cost. </li> <li> 29. The ABC Company signed a 90-day, $5,000 note payable to the XYZ Company in settlement of existing accounts payable. The interest rate of the agreement is 14 percent. Calculate the interest cost. Principal x Interest Rate x Time = Interest $5,000 x 0.14 x 90/365 = $172.60 What journal entries are required for the ABCWhat journal entries are required for the ABC Company? For the XYZ Company?Company? For the XYZ Company? Example: Interest </li> <li> 30. A Promissory Note </li> <li> 31. Accept Note: Accounts Payable............ 5,000.00 Note Payable............. 5,000.00 Pay Note Plus Interest: Note Payable................... 5,000.00 Interest Expense.............. 172.60 Cash.......................... 5,172.60 The ABC Company--Maker Journalizing Notes Receivable </li> <li> 32. Accept Note: Note Receivable............... 5,000.00 Accounts Receivable.. 5,000.00 Collect Note Plus Interest: Cash................................. 5,172.60 Note Receivable......... 5,000.00 Interest Revenue........ 172.60 The XYZ Company--Payee Journalizing Notes Receivable </li> <li> 33. Selling or Factoring Receivables Receivables are sold to factoring companies for cash. The factoring companies charge a percentage of the receivable as a service cost. Factoring allows companies to receive cash now, instead of waiting to collect on the receivable. </li> </ul>

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