ADM1340 Ch8 Accounts Receivable
École de Gestion Telfer School of Management - Financial Accounting: Chapter 8 Notes
Page 1: Introduction to Receivables
Chapter Title: Reporting and Analyzing Receivables
Instructor: Shujun Ding, Ph.D.
Page 2: Learning Objectives
Understand and perform valuation and recording of accounts receivable and uncollectible accounts receivable.
Calculate the ratio: Days Sales in Accounts Receivable.
Valuation and recording of notes receivable.
Page 3: Accounts Receivable Overview
Definition: Accounts receivable is created when companies make sales to customers on open accounts.
Characteristics:
Verbal agreement
Due within 30-60 days
No interest applicable
Classified as a current asset
Uncollectible Accounts Receivable: Strategies for dealing with uncollectible accounts.
Page 4: Uncollectible Accounts - Direct Method
Example: Nov 30, 2023 - Not paid ($2,000 defaulted)
Payments:
Feb 20, 2024: Paid $8,000
Accounting Records:
2023: Revenue: $10,000, Accounts Receivable: $10,000
2024: Credit Losses: $2,000.
Page 5: Uncollectible Accounts - Allowance Method
Estimate Credit Losses for 2023: Accounts Receivable $10,000.
Adjustments for the accounting period include:
Revenue: $10,000
Estimated Credit Losses: $10,000
Allowance for Expected Credit Losses established.
Page 6: Adjusting Journal Entry
Entry:
Debit: Credit Losses $XX
Credit: Allowance for Expected Credit Losses $XX
In the Allowance Method, unrealized losses are matched against sales in the period incurred.
Page 7: Aging Analysis for Credit Losses
Aging: Current credit losses estimated as $700 - $100 = $600.
Adjusting Entry:
Debit: Credit Losses 600
Credit: Allowance for Expected Credit Losses 600.
Total Accounts Receivable: $60,000.
Page 8: Write-offs of Uncollectible Accounts
On Feb 20, 2024, determined $900 of accounts receivable was uncollectible.
Journal Entry to Write-off:
Debit: Allowance for Expected Credit Losses 900
Credit: Accounts Receivable 900.
Page 9: Recovery of Written-off Accounts Receivable
On Mar 1, 2024, customer paid $900 previously deemed uncollectible.
Reverse the write-off entry:
Debit: Accounts Receivable 900
Credit: Allowance for Expected Credit Losses 900.
Record the collection:
Debit: Cash 900
Credit: Accounts Receivable 900.
Page 10: Estimating Allowance for Receivables
Process:
Estimate the desired ending balance using the aging method.
Record the adjusting entry for estimated credit losses.
Calculating Credit Losses:
Credit losses = End Balance – Unadjusted Balance.
Page 11: Writing Off Uncollectible Accounts
When an account is uncollectible, it should be fully written off:
Debit: Allowance for Expected Credit Losses XXX.
Credit: Accounts Receivable XXX.
Page 12: Recovery of Written-off Accounts (Summary)
For a previously written-off recovery:
Reverse the previous write-off entries.
Record the cash collection.
Page 13: In-Class Exercise
Exercise Q8-1 to reinforce understanding of content.
Page 14: Valuation of Accounts Receivable
Allowance Method: Contra account for Accounts Receivable.
Represents an estimate of amounts not expected to be collected.
Listed as a current asset on the statement of financial position.
Page 15: Learning Objectives (Review)
Understanding valuation and recording of accounts receivable and uncollectible accounts receivable.
Calculating the Days Sales in Accounts Receivable ratio.
Learning to value and record notes receivable.
Page 16: Ratios - Asset Management Analysis
Days Sales in Accounts Receivable:
Formula: (Average Accounts Receivable / Net Credit Sales) * 365
Page 17: Comparison of Home Depot vs. Lowe’s (2023)
Assets and Revenues: Home Depot: $76.5b Assets, $152.7b Revenues; Lowe’s: $41.8b Assets, $86.4b Revenues.
Page 18: Home Depot Consolidated Balance Sheets
Current assets as of January 28, 2024, and January 29, 2023.
Details on liabilities and stockholders' equity.
Shows substantial assets and equity variations between the two years.
Page 19: Home Depot Consolidated Statements of Earnings
2023 Financials:
Net sales: $152,669 million
Cost of sales: $101,709 million
Net earnings: $15,143 million.
Page 20: Summary of Home Depot Consolidated Balance sheets
Comparison of the key financial items across years 2023 and 2024.
Presentation of assets, liabilities, and stockholders' equity components.
Page 21: Days Sales in Accounts Receivable Calculation
Formula applied for Home Depot yields approximately 8 days.
Page 22: Lowe's Consolidated Balance Sheets
Overview of current assets, liabilities, and shareholder's deficit as of February 2, 2024, and February 3, 2023.
Page 23: Lowe's Consolidated Statements of Earnings
Summary of financial performance for Lowe’s with net earnings noted.
Page 24: Continued Overview of Lowe's Financials
Further details on liabilities, assets, and shareholders' deficit, similar to the previous pages.
Page 25: Days Sales in Accounts Receivable for Lowe's
Calculation results show 0 days collection period for Lowe's data provided.
Page 26: Comparative Analysis of Days Sales in Accounts Receivable
Summary comparing Lowe's and Home Depot’s days sales in receivables.
Page 27: Learning Objectives (Reiteration)
Understanding the valuation and accounting aspects of receivables.
Calculating ratios for better understanding of accounts receivable management.
Page 28: Notes Receivable Overview
Definition: Written promises from customers to pay.
Characteristics include:
Formal repayments (promissory notes), specific terms, interest payment obligations.
Classified as current or non-current assets.
Page 29: Example of a Notes Receivable
Example of a promissory note payable to TD Canada Trust with specific terms and interest obligations.
Page 30: In-Class Exercise
Exercise Q8-2 to reinforce the knowledge of notes receivable.
Page 31: Notes Receivable - Recognition
Required Journal Entries:
Record face value and relate it to accounts receivable.
Record any interest accrued.
Record cash upon collection of the note.
Page 32: Notes Receivable – Interest Calculation
Interest Formula:
Face Value of Note * Annual Interest Rate * Time (in terms of one year) = Interest Amount.
Page 33: Dishonored Notes Receivable
Actions Based on Likelihood of Collection:
If collection is likely: debit Accounts Receivable.
If collection is unlikely: debit Credit Losses.
Page 34: Homework Assignments
Assigned textbook questions to solidify knowledge of topics discussed.
Exercises: E8-2, E8-3, P8-4A, E8-7, E8-11, E8-12, P8-3A, P8-1B.