wrd 26e_ie ppt_ch 09
TRANSCRIPT
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Warren
Reeve
Duchac
Accounting
26e
Receivables9C H A P T E R
human/iStock/360/GettyImages
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Learning Objectives
LO1: Describe the common classes of receivables.
LO2: Describe the accounting for uncollectible receivables. LO3: Describe the direct write-o method of accounting for
uncollectible receivables.
LO4: Describe the allowance method of accounting foruncollectible receivables.
LO5: Compare the direct write-o and allowance methods ofaccounting for uncollectible accounts.
LO6: Describe the accounting for notes receivable. LO7: Describe the reporting of receivables on the balance
sheet. LO8: Describe and illustrate the use of accounts receivable
turnover and number of days sales in receivables toevaluate a companys eciency in collecting its receivables.
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Classification of Receivables
The term receivablesincludes all moneyclaims against other entities includingpeople companies and otherorgani!ations.
The receivables that result from sales onaccount are normally accounts receivableor notes receivable.
"otes and accounts receivable that resultfrom sales transactions are sometimescalled trade receivables.
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Accounts Receivables
The most common transaction creating areceivable is selling merchandise orservices on account #on credit$.
The receivable is recorded as a debit to
%ccounts &eceivable. 'uch accounts receivable are normally
collected within a short period such as ()or *) days.
They are classi+ed on the balance sheet asa current asset.
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otes Receivables
Notes receivable are amounts thatcustomers owe for which a formal writteninstrument of credit has been issued.
,f notes receivable are epected to be
collected within a year they are classi+edon the balance sheet as a current asset.
"otes are often used for credit periods ofmore than *) days.
"otes may also be used to settle acustomers accounts receivable.
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Other Receivables
ther receivables include:o ,nterest receivableo Taes receivableo &eceivables from ocers or employees
ther receivables are normally reportedseparately on the balance sheet.o ,f they are epected to be collected within one
year they are classi+ed as current assets.
o ,f collection is epected beyond one yearthese receivables are classi+ed as noncurrentassets and reported under the caption,nvestments.
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!ncollectible Receivables"sli#e $ of %&
% ma/or issue of selling merchandise orservices on account #on credit$ is thatsome customers will not pay theiraccounts. That is some accounts
receivable will be uncollectible.
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!ncollectible Receivables"sli#e 2 of %&
Companies may shift the ris0 ofuncollectible receivables to othercompanies by not accepting sales onaccount.
Companies may also sell their receivables.'elling receivables is called factoring thereceivables.o The buyer of the receivables is called a factor.o %n advantage of factoring is that the company
selling its receivables immediately receivescash for operating and other needs.
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!ncollectible Receivables"sli#e ' of %&
&egardless of how careful a company is ingranting credit some credit sales will beuncollectible.
The operating epense recorded from
uncollectible receivables is called baddebt expense uncollectible accountsepense or doubtful accounts epense.
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!ncollectible Receivables"sli#e ( of %&
'ome indications that an account may beuncollectible include the following:o The receivable is past due.o The customer does not respond to the
companys attempts to collect.o The customer +les for ban0ruptcy.o The customer closes its business.o The company cannot locate the customer.
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!ncollectible Receivables"sli#e % of %&
The two methods of accounting foruncollectible receivables are as follows:o The direct write-of et!odrecords bad
debt epense only when an account isdetermined to be worthless. The direct write-o method is often used by small
companies and companies with few receivables.
o The allowance et!odrecords bad debtepense by estimating uncollectible accounts
at the end of the accounting period. 1enerally accepted accounting principles #1%%2$
re3uire companies with a large amount of receivablesto use the allowance method.
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rec r e) e o or!ncollectible Accounts"sli#e $ of '&
n 4ay 5) a 678)) account receivablefrom D. 9. &oss has been determined to beuncollectible. The entry to write o theaccount is as follows:
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rec r e) e o or!ncollectible Accounts"sli#e 2 of '&
%n account receivable that has beenwritten o may be collected later.
,n such cases the account is reinstated byan entry that reverses the write-o entry.
The cash received in payment is thenrecorded as a receipt on account.
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rec r e e o or
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rec r e) e o or!ncollectible Accounts"sli#e ' of '&
%ssume that the D. 9. &oss account writteno on 4ay 5) is later collected on"ovember 85. The reinstatement andreceipt of cash is recorded as follows:
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xample
xercise
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ournali!e the following transactions using the direct
write-o method of accounting for uncollectiblereceivables:
uly ;. &eceived 658)) from ay
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o+ance e o or!ncollectible Accounts"sli#e $ of 2&
n December (5 8)5= >Tone Companyhas an accounts receivable balance of68))))). >Tone estimates that a total of6()))) of the December (5 accounts
receivable will be uncollectible. Thefollowing ad/usting entry is made onDecember (5:
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%ince &x'one doesn(t )now w!ic!custoer accounts will be
uncollectible* a contra assetaccount called +llowance ,or
"oubt,ul +ccountsis credited ,or
t!e bad debts
o+ance e o or
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o+ance e o or !ncollectible Accounts"sli#e 2 of 2&
The preceding ad/usting entry aects theincome statement and the balance sheet.o n the income statement the 6()))) of pense will be matched against therelated revenues of the period.
o n the balance sheet the value of thereceivables is reduced to the amount that isepected to be collected or reali!ed. This amount 65?)))) #68))))) @ 6())))$ is
called the net reali.able value of the receivables.
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Write)Offs to the Allo+ance Account"sli#e $ of ,&
Ahen a customers account is identi+ed asuncollectible it is written o against theallowance account.
This re3uires the company to remove the
speci+c accounts receivable and an e3ualamount from the allowance account.
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Write)Offs to the Allo+ance Account"sli#e 2 of ,&
n anuary 85 8)5* ohn 2ar0ersaccount of 6*))) with >Tone Company iswritten o as follows:
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Write)Offs to the Allo+ance Account"sli#e ' of ,&
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The Allo+ance *etho#
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Write)Offs to the Allo+ance Account"sli#e ( of ,&
During 8)5* >Tone Company writes o68*?=)of uncollectible accounts including the6*))) account of ohn 2ar0er. %llowance
for Doubtful %ccounts will have a creditbalance of 6(8=) #6()))) @ 68*?=)$computed as follows:
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Write)Offs to the Allo+ance Account"sli#e % of ,&
,f >Tone Company had written o6(85)) in accounts receivable during8)5* %llowance for Doubtful %ccountswould have a debit balance of 685))
computed as follows:
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Write)Offs to the Allo+ance Account"sli#e 6 of ,&
The allowance account balances #creditbalance of 6(8=) and debit balance of685))$ in the preceding illustrations arebefore the end-of-period ad/usting entry.
%fter the end-of-period ad/usting entry isrecorded %llowance for Doubtful %ccountsshould always have a credit balance.
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Write)Offs to the Allo+ance Account"sli#e - of ,&
%n account receivable that has beenwritten o against the allowance accountmay be collected later.
9i0e the direct write-o method the
account is reinstated by an entry thatreverses the write-o entry. The cashreceived in payment is then recorded as areceipt on account.
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Write)Offs to the Allo+ance Account"sli#e , of ,&
"ancy 'miths account of 6=))) whichwas written o on %pril 8 is later collectedon une 5). >Tone Company records thereinstatement and collection as follows:
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xample
xercise
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ournali!e the following transactions using the
allowance method of accounting for uncollectiblereceivables:
uly ;. &eceived 658)) from ay
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Esti.ating !ncollectibles
The allowance method re3uires anestimate of uncollectible accounts at theend of the period.
This estimate is normally based on past
eperience industry averages andforecasts of the future.
The two methods used to estimateuncollectible accounts are as follows:o 2ercent of sales methodo %nalysis of receivables method
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P t f / l * th #
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Percent of /ales *etho#"sli#e $ of (&
'ince accounts receivable are created bycredit sales uncollectible accounts can beestimated as a percent of credit sales.
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P t f / l * th #
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Percent of /ales *etho#"sli#e 2 of (&
%ssume the following data for >ToneCompany on December (5 8)5* beforeany ad/ustments:
pense of 688=)) is estimatedas follows:
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P t f / l * th #
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Percent of /ales *etho#"sli#e ' of (&
The ad/usting entry for uncollectibleaccounts on December (5 8)5* is asfollows:
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P t f / l * th #
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Percent of /ales *etho#"sli#e ( of (&
%fter the ad/usting entry is posted to the ledger pense will have an ad/usted balance of 688=)) and%llowance for Doubtful %ccounts will have a balance of68=?=) #6(8=) B 688=))$.
The amount of the ad/usting entry is the amount estimatedfor pense. This estimate is credited to whateverthe unad/usted balance is for %llowance for Doubtful%ccounts.2016 engage !ea"ning# $ll Rights Rese"ve%# &ay not be scanne%' co(ie% o" %u(licate%' o" (oste% to a (ublicly accessible )ebsite' in )hole o" in (a"t#
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xample
xercise
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%t the end of the current year %ccounts
&eceivable has a balance of 6)))))%llowance for Doubtful %ccounts has a creditbalance of 6?=)) and sales for the yeartotal 6(=))))).
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xample
xercise
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/ercent o, %ales $et!od0slide 2 o, 2
Anal0sis of Receivables *etho#
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Anal0sis of Receivables *etho#"sli#e $ of 6&
The analysis of receivables method isbased on the assumption that the longeran account receivable is outstanding theless li0ely it is that it will be collected.
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Anal0sis of Receivables *etho#
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Anal0sis of Receivables *etho#"sli#e 2 of 6&
The analysis of receivables method is applied asfollows:o 'tep 5: The due date of each account receivable is
determined.o 'tep 8: The number of days each account is past due is
determined. This is the number of days between the duedate of the account and the date of the analysis.
o 'tep (: >ach account is placed in an aged classaccording to its days past due #e.g. 5@() days past due(5@*) days past due *5@;) days past due and so on$
o 'tep 7: The totals for each aged class are determined.o 'tep =: The total for each aged class is multiplied by an
estimated percentage of uncollectible accounts for thatclass.
o 'tep *: The estimated total of uncollectible accounts isdetermined as the sum of the uncollectible accounts foreach aged class.2016 engage !ea"ning# $ll Rights Rese"ve%# &ay not be scanne%' co(ie% o" %u(licate%' o" (oste% to a (ublicly accessible )ebsite' in )hole o" in (a"t#
Anal0sis of Receivables *etho#
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Anal0sis of Receivables *etho#"sli#e ' of 6&
The preceding steps are then summari!edin an aging schedule.
This overall process is called ain t!ereceivables.
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A i f R i bl / h # l
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Aging of Receivables /che#ule1
Dece.ber '$1 2$6
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Anal0sis of Receivables *etho#
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Anal0sis of Receivables *etho#"sli#e ( of 6&
The sum of the estimated uncollectibleaccounts is the estimated uncollectibleaccounts on December (5 8)5*.
This is the desired ad/usted balance for
%llowance for Doubtful %ccounts. Comparing the sum of the estimated
uncollectible accounts in the agingschedule with the unad/usted balance of
the allowance account determines theamount of the ad/ustment for pense.
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Anal0sis of Receivables *etho#
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Anal0sis of Receivables *etho#"sli#e % of 6&
Gor >Tone Company the unad/ustedbalance of the allowance account is acredit balance of 6(8=). The amount tobe added to this balance is therefore
68(87) #68*7;) @ 6(8=)$. The ad/ustingentry is as follows:
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Anal0sis of Receivables *etho#
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Anal0sis of Receivables *etho#"sli#e 6 of 6&
%fter the ad/usting entry is posted to the ledger pense will have an ad/usted balance of 68(87) and%llowance for Doubtful %ccounts will have a balance of68*7;).
The amount of the ad/usting entry is the amount that willyield an ad/usted balance for %llowance for Doubtful%ccounts e3ual to that estimated by the aging schedule.
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+nalsis o, eceivables
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xample
xercise
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%t the end of the current year %ccounts
&eceivable has a balance of 6)))))%llowance for Doubtful %ccounts has a creditbalance of 6?=)) and sales for the yeartotal 6(=))))). Hsing the aging method
the balance of %llowance for Doubtful%ccounts is estimated at 6()))).
Determine #a$ the amount of the ad/usting
entry for uncollectible accounts #b$ thead/usted balances of %ccounts &eceivable%llowance for Doubtful %ccounts and pense and #c$ the net reali!able
value of accounts receivable.
$et!od
0slide 1 o, 2
+nalsis o, eceivables
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xample
xercise
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$et!od
0slide 2 o, 2
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Difference 3et+een Esti.ation *etho#s
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Co.4aring Direct Write)Off
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Co.4aring Direct Write Off
an# Allo+ance *etho#s
The following transactions are ta0en fromthe records of Iobbs Company for theyear ending December (5 8)5=:
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Co.4aring Direct Write Off
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Co.4aring Direct Write)Off
an# Allo+ance *etho#s
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Direct Write)Off an# Allo+ance *etho#s
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t R i bl
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otes Receivable
% note receivable or promissory note is awritten document containing a promise topay the face amount usually with intereston demand or at a date in the future.
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Characteristics of otes Receivable"sli#e $ of '&
Characteristics of a promissory note are asfollows:
5.The makeris the party ma0ing the promise topay.
8.Thepayeeis the party to whom the note ispayable.
(.The face amountis the amount for which thenote is written on its face.
7.The issuance dateis the date a note is issued.
=.The due dateor maturity dateis the date thenote is to be paid.
*.The termof a note is the amount of timebetween the issuance and due dates.
?.The interest rateis the rate of interest that2016 engage !ea"ning# $ll Rights Rese"ve%# &ay not be scanne%' co(ie% o" %u(licate%' o" (oste% to a (ublicly accessible )ebsite' in )hole o" in (a"t#
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Pro.issor0 ote
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Characteristics of otes Receivable
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Characteristics of otes Receivable"sli#e 2 of '&
The due date of une 57 8)5= is computedas follows:
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Deter.ining Due Date of Pro.issor0 ote
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Characteristics of otes Receivable
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Characteristics of otes Receivable"sli#e ' of '&
The interest on the note is computed asfollows:
The aturit value is the amount thatmust be paid at the due date of the notewhich is the sum of the face amount andthe interest. The maturity value of the
note is 68)=) #68))) B 6=)$.
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Accounting for otes Receivable
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Accounting for otes Receivable"sli#e 2 of ,&
Gor eample a company accepts a ()-day58F note dated "ovember 85 8)5* insettlement of the account of A. %.
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Accounting for otes Receivable"sli#e ' of ,&
%t the due date the company records thereceipt of 6*)*) #6*))) face amountplus 6*) interest$ as follows:
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Accounting for otes Receivable
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g"sli#e ( of ,&
,f the ma0er of the note fails to pay thenote on the due date it is considered adis!onored note receivable.
The face amount of the note plus any
interest due are then transferred bac0 tothe customers account receivableaccount.
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Accounting for otes Receivable
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g"sli#e % of ,&
Gor eample the 6*))) ()-day 58Fnote received from A. %.
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g"sli#e 6 of ,&
% company receiving a note should recordan ad/usting entry for any accrued interestat the end of the period.
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Accounting for otes Receivable
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g"sli#e - of ,&
Gor eample Crawford Company issues a67))) ;)-day 58F note datedDecember 5 8)5* to settle its accountreceivable. ,f the accounting period endson December (5 the company receivingthe note would record the followingentries:
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Accounting for otes Receivable
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g"sli#e , of ,&
n 4arch 5 8)5? the company receives6758) #67))) face amount B 658)interest$ from Crawford Company. Thecompany receiving the note would recordthis entry as follows:
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Note eceivable
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xample
xercise
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(a"t#
'ame Day 'urgery Center received a 58)-
day *F note for 67)))) dated 4arch 57from a patient on account.
a. Determine the due date of the note.
b. Determine the maturity value of the note.
c. ournali!e the entry to record the receiptof the payment of the note at maturity.
0slide 1 o, 2
Note eceivable
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xample
xercise
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(a"t#
0slide 2 o, 2
Re4orting Receivables on the 3alance /heet
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Re4orting Receivables on the 3alance /heet
%ll receivables that are epected to bereali!ed in cash within a year are reportedin the Current assets section of thebalance sheet.
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nanc a na 0s s an n er4re a on7Accounts Receivable Turnover
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Accounts Receivable Turnover"sli#e $ of 2&
The accounts receivable turnovermeasures how fre3uently during the yearthe accounts receivable are beingconverted to cash.
The accounts receivable turnover iscomputed as follows:
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%ccounts &eceivableTurnover J
'ales
%verage %ccounts&eceivable
nanc a na 0s s an n er4re a on7Accounts Receivable Turnover
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Accounts Receivable Turnover"sli#e 2 of 2&
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nanc a na 0s s an n er4re a on7u.ber of Da0s8 /ales in Receivables
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u.ber of Da0s /ales in Receivables"sli#e $ of 2&
The nuber o, das( sales inreceivables is an estimate of the lengthof time the accounts receivable have beenoutstanding.
The number of days sales in receivables iscomputed as follows:
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"umber of Days'ales in
&eceivables
%verage %ccounts&eceivable
%verage Daily 'ales
J
nanc a na 0s s an n er4re a on7u.ber of Da0s8 /ales in Receivables
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u.ber of Da0s /ales in Receivables"sli#e 2 of 2&
2016 engage !ea"ning# $ll Rights Rese"ve%# &ay not be scanne%' co(ie% o" %u(licate%' o" (oste% to a (ublicly accessible )ebsite' in )hole o" in (a"t#
+ccounts eceivable'urnover and Nuber o,
" ( % l i i bl
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xample
xercise
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(a"t#
a. Determine the accounts receivable turnover for8)5* and 8)5=.
b. Determine the number of days sales inreceivables for 8)5* and 8)5=. Hse (*= days andround to one decimal place.
c. Does the change in accounts receivable turnoverand the number of days sales in receivables from8)5= to 8)5* indicate a favorable or an
unfavorable trendK
"as( %ales in eceivables0slide 1 o, 2
Ginancial statement data for years ending
December (5 for sterman Company follows:
+ccounts eceivable'urnover and Nuber o,
" ( % l i i bl
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xample
xercise
"as( %ales in eceivables0slide 2 o, 2