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Lecture Financial reporting and analysis (6/e) - Chapter 8: Receivables

Chapter 8 - Receivables. After studying this chapter you will be able to understand: How to account for accounts receivable using net realizable value? How to analyze accounts receivable under net realizable value accounting? How to spot whether or not reported receivables arose from real sales? How and why interest is recorded on “non-interest bearing” notes? How to account for accounts receivable and notes receivable using the fair value option? | Receivables Revsine/Collins/Johnson/Mittelstaedt: Chapter 8 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Learning objectives How to account for accounts receivable using net realizable value. How to analyze accounts receivable under net realizable value accounting. How to spot whether or not reported receivables arose from real sales. How and why interest is recorded on “non-interest bearing” notes. How to account for accounts receivable and notes receivable using the fair value option. How companies use receivables to accelerate cash inflows and how this affects financial statement ratios. 8- Learning objectives (cont.) Why receivables are securitized and how this affects financial statement ratios Why receivables are restructured when a customer experiences financial difficulty and how to account for the troubled-debt restructuring. The key differences between current GAAP and IFRS requirements for receivable accounting and possible changes. 8- Accounts receivable: Assessing net realizable value Accounts receivable are generally reflected in the balance sheet at their net realizable value. Two things must be estimated to determine the net realizable value of receivables: Uncollectibles—the amount that will not be collected because customers are unable to pay. Returns and allowances—the amount that will not be collected because customers return the merchandise or are allowed a reduction in the amount owed. NRV of receivables Gross amount owned Estimated uncollectibles Estimated returns & allowances = - - 8- Accounts receivable: Why estimating uncollectibles is important Most companies establish credit policies by weighing the expected cost of credit sales against the benefit of increased sales. This tradeoff illustrates that bad debts are often unavoidable. The matching principle requires that some estimate of uncollectible accounts be offset against current period sales. Customer collection and billing . | Receivables Revsine/Collins/Johnson/Mittelstaedt: Chapter 8 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Learning objectives How to account for accounts receivable using net realizable value. How to analyze accounts receivable under net realizable value accounting. How to spot whether or not reported receivables arose from real sales. How and why interest is recorded on “non-interest bearing” notes. How to account for accounts receivable and notes receivable using the fair value option. How companies use receivables to accelerate cash inflows and how this affects financial statement ratios. 8- Learning objectives (cont.) Why receivables are securitized and how this affects financial statement ratios Why receivables are restructured when a customer experiences financial difficulty and how to account for the troubled-debt restructuring. The key differences between current GAAP and IFRS requirements for receivable accounting and possible