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Learning ObjectivesLearning Objectives
1. Recognize Accounts Receivable
2. Valuing Accounts Receivable Bad debt allowance & Bad debt expense
3. Notes Receivable
4. Disposing of Receivables
5. Decision Analysis: Accounts Receivable Turnover
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1. Recognizing Accounts Receivable- Accounts Receivable
1. Recognizing Accounts Receivable- Accounts Receivable
Amounts due from customers for credit sales.
Credit sales require:• Maintaining a separate
account receivable for each customer.
• Accounting for bad debts that result from credit sales.
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$20.5 Mil.
$92.2 Mil.
$6,785 Mil.
$97.4 Mil.
As a percentage of total assets
1. Recognizing Accounts Receivable- Firms’ percent assets in Account receivables
1. Recognizing Accounts Receivable- Firms’ percent assets in Account receivables
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On July 16, Barton, Co. sells $950 of merchandise on credit to Webster, Co., and $1,000 of merchandise on account to Matrix, Inc.
On July 16, Barton, Co. sells $950 of merchandise on credit to Webster, Co., and $1,000 of merchandise on account to Matrix, Inc.
1. Recognizing Accounts Receivable - Sales on Credit
1. Recognizing Accounts Receivable - Sales on Credit
Jul. 16 Accounts Receivable - Webster 950 Sales 950
To record credit sales to Webster Co.
Accounts Receivable - Matrix 1,000 Sales 1,000
To record credit sales to M atrix, Inc.
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Subsidiary ledgerSubsidiary ledger
Subsidiary ledger is a list of individual accounts with a common characteristic. A subsidiary ledger contains detailed information on specific accounts in the general ledger.
When a company has more than one credit customer, a subsidiary ledger is set up to keep a separate account for each customer, to show how much each customer purchased, paid, and has yet to pay. This subsidiary ledger is called the accounts receivable (subsidiary) ledger.
Accounts receivable (subsidiary) ledger can help managers to assess the credit (信用 ) of one customer and make decisions about credit sales, credit period, credit amount, etc.
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Subsidiary ledgerSubsidiary ledger
Date PR Debit Credit BalanceJul. 16 xxxx xxxx
General LedgerAccounts Receivable
Date PR Debit Credit BalanceJul. 16 xxx xxx
Accounts Receivable LedgerAccounts Receivable - Mr. A
Date PR Debit Credit BalanceJul. 16 xxx xxx
Accounts Receivable LedgerAccounts Receivable - Mr. C
Date PR Debit Credit BalanceJul. 16 xxx xxx
Accounts Receivable LedgerAccounts Receivable - Mr. B
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Subsidiary ledgerSubsidiary ledger
The accounts receivable account in general ledger is to control the accounts receivable ledger and is called a controlling account.
Inventory, equipment, accounts payable can have subsidiary ledgers so as to provide information for managers.
When posting, total amount is posted to accounts receivable in general ledger. Meanwhile, each customer’s amount is posted to his or her account in the subsidiary ledger.
The balance in the accounts receivable account in general ledger must equal the sum of all balances of its customers’ accounts.
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Sales on CreditSales on Credit
Date PR Debit Credit BalanceJul. 16 950 950
Matrix, Inc.Date PR Debit Credit BalanceJul. 16 1,000 1,000
Accounts Receivable LedgerWebster, Co.
Webster, Co. 950$ Matrix, Inc. 1,000 Total 1,950$
Schedule ofAccounts Receivable
Date PR Debit Credit BalanceJul. 16 1,950 1,950
General LedgerAccounts Receivable
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On July 31, Barton, Co. collects $500 from Webster, Co., and $800 from Matrix, Inc. on account.
On July 31, Barton, Co. collects $500 from Webster, Co., and $800 from Matrix, Inc. on account.
Sales on CreditSales on Credit
Jul. 16 Cash 500 Accounts Receivable - Webster 500
To record cash collections on account
Cash 800 Accounts Receivable - Matrix 800
To record cash collections on account
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Sales on CreditSales on Credit
Date PR Debit Credit BalanceJul. 16 950 950 Jul. 31 500 450
Matrix, Inc.Date PR Debit Credit BalanceJul. 16 1,000 1,000 Jul. 31 800 200
Accounts Receivable LedgerWebster, Co.
Webster, Co. 450$ Matrix, Inc. 200 Total 650$
Schedule ofAccounts Receivable
Date PR Debit Credit BalanceJul. 16 1,950 1,950 Jul. 31 1,300 650
General LedgerAccounts Receivable
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Advantages of allowing customers to use credit cards:
Customers’ credit is
evaluated by the credit
card issuer.
Customers’ credit is
evaluated by the credit
card issuer.
The risks of extending credit are transferred to the credit card issuer.
The risks of extending credit are transferred to the credit card issuer.
Cash collections are speeded up.
Cash collections are speeded up.
Sales increase by providing purchase
options to the customer.
Sales increase by providing purchase
options to the customer.
1. Recognizing Accounts Receivable - Credit Card Sales
1. Recognizing Accounts Receivable - Credit Card Sales
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With bank credit cards, the seller deposits the credit card sales receipt in the bank just like it deposits a customer’s check.
With bank credit cards, the seller deposits the credit card sales receipt in the bank just like it deposits a customer’s check.
The bank increases the balance in the company’s checking account.
The bank increases the balance in the company’s checking account.
The company usually pays a fee of 1% to 5% for the service.
The company usually pays a fee of 1% to 5% for the service.
Credit Card SalesCredit Card Sales
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On July 16, 2004, Barton, Co. has a bank credit card sale of $500 to a customer. The bank
charges a processing fee of 2%. The cash is received immediately.
On July 16, 2004, Barton, Co. has a bank credit card sale of $500 to a customer. The bank
charges a processing fee of 2%. The cash is received immediately.
Credit Card SalesCredit Card Sales
Jul. 16 Cash 490 Credit Card Expense 10
Sales 500 To record credit card sales and fees.
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On July 16, 2004, Barton, Co. has a bank credit card sale of $500 to a customer. The bank
charges a processing fee of 2%. Barton must remit the credit card sale to the credit card
company and wait for the payment.
On July 16, 2004, Barton, Co. has a bank credit card sale of $500 to a customer. The bank
charges a processing fee of 2%. Barton must remit the credit card sale to the credit card
company and wait for the payment.
Credit Card SalesCredit Card Sales
Jul. 16 Accounts Receivable - Credit Card Co. 490 Cardit Card Expense 10
Sales 500 To record credit card sales and fees.
Jul. 28 Cash 490
Accounts Receivable - Credit Card Co. 490
To record receipt from credit card company
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Installment Accounts ReceivableInstallment Accounts Receivable
Amounts owed by customers from credit sales for which payment is required in periodic amounts over
an extended time period. The customer is usually charged interest.
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Some customers may not pay their account. Uncollectible amounts are referred to as bad debts. There are two
methods of dealing with bad debts:
• Direct Write-Off Method• Allowance Method
Some customers may not pay their account. Uncollectible amounts are referred to as bad debts. There are two
methods of dealing with bad debts:
• Direct Write-Off Method• Allowance Method
2. Valuing Accounts Receivable2. Valuing Accounts Receivable
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On August 4, Barton determines it cannot collect $350 from Martin, Inc., a
credit customer.
On August 4, Barton determines it cannot collect $350 from Martin, Inc., a
credit customer.
2. Valuing Accounts Receivable - Direct Write-Off Method2. Valuing Accounts Receivable - Direct Write-Off Method
Aug. 4 Bad Debts Expense 350 Accounts Receivable - Martin 350
To write-off uncollectible account
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After the write-off, Martin decides to pay $200.After the write-off, Martin decides to pay $200.
Direct Write-Off MethodDirect Write-Off Method
Sep. 9 Accounts Receivable - Martin 200 Bad Debts Expense 200
To reinstate account previously written-off
Sep. 9 Cash 200 Accounts Receivable - Martin 200
To record partial payment on account
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Matching vs. MaterialityMatching vs. Materiality
Matching requires expenses to be
reported in the same accounting period as the sales they help
produce.
Matching requires expenses to be
reported in the same accounting period as the sales they help
produce.
Materiality states that an amount can
be ignored if its effect on the
financial statements is unimportant to users’ business
decisions.
Materiality states that an amount can
be ignored if its effect on the
financial statements is unimportant to users’ business
decisions.
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At the end of each period, estimate total bad debts expected to be realized from that period’s sales.
There are two advantages to the allowance method:
1. It records estimated bad debts expense in the period when the related sales are recorded.
2. It reports accounts receivable on the balance sheet at the estimated amount of cash to be collected.
At the end of each period, estimate total bad debts expected to be realized from that period’s sales.
There are two advantages to the allowance method:
1. It records estimated bad debts expense in the period when the related sales are recorded.
2. It reports accounts receivable on the balance sheet at the estimated amount of cash to be collected.
2. Valuing Accounts Receivable - Allowance Method2. Valuing Accounts Receivable - Allowance Method
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Recording Bad Debts ExpenseRecording Bad Debts Expense
At the end of its first year of operations, Barton Co. estimates that $3,000 of it accounts receivable will prove uncollectible. The total accounts receivable balance at
December 31, 2004, is $278,000.
At the end of its first year of operations, Barton Co. estimates that $3,000 of it accounts receivable will prove uncollectible. The total accounts receivable balance at
December 31, 2004, is $278,000.
Dec. 31 Bad Debts Expense 3,000 Allowance for Doubtful Accounts 3,000
To record estimated bad debts
Contra asset accountContra asset account
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Recording Bad Debts ExpenseRecording Bad Debts Expense
At the end of its first year of operations, Barton Co. estimates that $3,000 of it accounts receivable will prove uncollectible. The total accounts receivable balance at
December 31, 2004, is $278,000.
At the end of its first year of operations, Barton Co. estimates that $3,000 of it accounts receivable will prove uncollectible. The total accounts receivable balance at
December 31, 2004, is $278,000.
Bal. 278,000Accounts Receivable
Dec. 31 3,000Allowance for Doubtful Accounts
Dec. 31 Bad Debts Expense 3,000 Allowance for Doubtful Accounts 3,000
To record estimated bad debts
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Recording Bad Debts ExpenseRecording Bad Debts Expense
At the end of its first year of operations, Barton Co. estimates that $3,000 of it accounts receivable will prove uncollectible. The total accounts receivable balance at
December 31, 2004, is $278,000.
At the end of its first year of operations, Barton Co. estimates that $3,000 of it accounts receivable will prove uncollectible. The total accounts receivable balance at
December 31, 2004, is $278,000.
CashAccounts receivable 278,000$ Less: Allowance for doubtful accounts 3,000 275,000$ Inventory
Barton, Co.Partial Balance Sheet
December 31, 2004
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Two Methods 1. Percent of Sales Method
2. Accounts Receivable Methods Percent of Accounts Receivable Aging of Accounts Receivable
Method
Two Methods 1. Percent of Sales Method
2. Accounts Receivable Methods Percent of Accounts Receivable Aging of Accounts Receivable
Method
2. Valuing Accounts Receivable - Estimating Bad Debts Expense2. Valuing Accounts Receivable - Estimating Bad Debts Expense
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Bad debts expense is computed as follows:
Percent of Sales MethodPercent of Sales Method
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Barton has credit sales of $1,400,000 in 2004.
Management estimates 0.5% of credit sales will eventually
prove uncollectible.
What is Bad Debts Expense for 2004?
Percent of Sales MethodPercent of Sales Method
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Barton’s accountant computes estimated
Bad Debts Expense of $7,000.
Percent of Sales MethodPercent of Sales Method
Dec. 31 Bad Debts Expense 7,000 Allowance for Doubtful Accounts 7,000
To record estimated bad debts
壞賬準備 (撥備 )
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Compute the estimate of the Allowance for Doubtful Accounts.
Bad Debts Expense is computed as:
Percent of Accounts Receivable MethodPercent of Accounts Receivable Method
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Barton has $100,000 in accounts receivable and a $900 credit balance in Allowance for
Doubtful Accounts on December 31, 2004. Past
experience suggests that 4% of receivables are uncollectible.
What is Barton’s Bad Debts Expense for 2004?
Barton has $100,000 in accounts receivable and a $900 credit balance in Allowance for
Doubtful Accounts on December 31, 2004. Past
experience suggests that 4% of receivables are uncollectible.
What is Barton’s Bad Debts Expense for 2004?
Percent of Accounts ReceivablePercent of Accounts Receivable
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Desired balance in Allowance for Doubtful Accounts.
Percent of Accounts ReceivablePercent of Accounts Receivable
Dec. 31 Bad Debts Expense 3,100 Allowance for Doubtful Accounts 3,100
To record estimated bad debts
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Year-end Accounts Receivable is broken down into age classifications.
Year-end Accounts Receivable is broken down into age classifications.
Compute a separate allowance for each age grouping.
Compute a separate allowance for each age grouping.
Aging of Accounts Receivable MethodAging of Accounts Receivable Method
Each age grouping has a different likelihood of being uncollectible.
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Barton, Co.Schedule of Accounts Receivable by Age
December 31, 2004
Days Past Due
Accounts Receivable
Balance Percent
Uncollectible
Estimated Uncollectible
Amount
Not Yet Due 64,500$ 1% 645$ 1 - 30 Days Past Due 18,500 3% 555 31 - 60 Days Past Due 10,000 7% 700 61 - 90 Days Past Due 3,900 40% 1,560 Over 90 Days Past Due 3,100 60% 1,860
100,000$ 5,320$
Aging of Accounts ReceivableAging of Accounts Receivable
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Barton’s unadjusted balance in the allowance account is
$900.
We estimated the proper balance to be $5,320.
Barton’s unadjusted balance in the allowance account is
$900.
We estimated the proper balance to be $5,320.
Aging of Accounts ReceivableAging of Accounts Receivable
Dec. 31 Bad Debts Expense 4,420 Allowance for Doubtful Accounts 4,420
To record estimated bad debts
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With the allowance method, when an account is determined to be uncollectible, the debit goes to Allowance for Doubtful Accounts.
With the allowance method, when an account is determined to be uncollectible, the debit goes to Allowance for Doubtful Accounts.
Writing Off a Bad DebtWriting Off a Bad Debt
Barton determines that Martin’s $300 account is uncollectible on Feb.2, 2005
Barton determines that Martin’s $300 account is uncollectible on Feb.2, 2005
Feb.2 Allowance for Doubtful Accounts 300 Accounts Receivable - Martin 300
To write-off an uncollectible account
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Subsequent collections on accounts written-off require that the original write-off entry be reversed
before the cash collection is recorded.
Subsequent collections on accounts written-off require that the original write-off entry be reversed
before the cash collection is recorded.
Recovery of a Bad DebtRecovery of a Bad Debt
Feb. 8 Accounts Receivable - Martin 300 Allowance for Doubtful Accounts 300
To reinstate account previously written-off
Feb. 8 Cash 300 Accounts Receivable - Martin 300
To record full payment on account
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% of Sales
Emphasis on Matching
SalesBad
Debts Exp.
Income Statement
Focus
Income Statement
Focus
% of Receivables
Emphasis on Realizable Value
Accts. Rec. All. for
Doubtful Accts.
Balance Sheet Focus
Balance Sheet Focus
Aging of Receivables
Emphasis on Realizable Value
Accts. Rec. All. for
Doubtful Accts.
Balance Sheet Focus
Balance Sheet Focus
2. Valuing Accounts Receivable - Summary of Bad debt expense2. Valuing Accounts Receivable - Summary of Bad debt expense
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A note is a written
promise to pay a specific amount at a
specific future date.
3. Notes Receivable3. Notes Receivable
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$1,000.00 July 10, 2004
Ninety days
Barton Company, Los Angeles, CA
One thousand and no/100 --------------------------------- Dollars
First National Bank of Los Angeles, CA
42
12%
Julia Browne
after date I promise to pay to
the order of
Payable atValue received with interest at per annumNo. Due Oct. 8, 2004
For Barton, Co.
Term
Payee
Maker
3. Notes Receivable - Promissory Note3. Notes Receivable - Promissory Note
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$1,000.00 July 10, 2004
Ninety days
Barton Company, Los Angeles, CA
One thousand and no/100 --------------------------------- Dollars
First National Bank of Los Angeles, CA
42
12%
Julia Browne
after date I promise to pay to
the order of
Payable atValue received with interest at per annumNo. Due Oct. 8, 2004
For Barton, Co.
Due Date
Promissory NotePromissory Note
Principal
Interest Rate
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If the note is expressed in days, base a year on 360
days.
If the note is expressed in days, base a year on 360
days.
Even for maturities less
than 1 year, the rate is
annualized.
Even for maturities less
than 1 year, the rate is
annualized.
3. Notes Receivable - Interest Computation3. Notes Receivable - Interest Computation
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On March 1, 2004, Matrix, Inc. purchased a copier for
$12,000 from Office Supplies, Inc. Matrix gave Office Supplies a 9% note due in 90 days in payment
for the copier.
How much interest will be paid to Office Supplies, Inc.
in 90 days?
On March 1, 2004, Matrix, Inc. purchased a copier for
$12,000 from Office Supplies, Inc. Matrix gave Office Supplies a 9% note due in 90 days in payment
for the copier.
How much interest will be paid to Office Supplies, Inc.
in 90 days?
Computing Maturity and InterestComputing Maturity and Interest
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Computing Maturity and InterestComputing Maturity and Interest
Days in March 31 Minus the date of the note 1 Days remaining in March 30 Days in April 30 Days in May to maturity 30 Period of the note in days 90
The note is due and payable on May 30, 2004.
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Total interest due at May 30.
Computing Maturity and InterestComputing Maturity and Interest
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Recognizing Notes ReceivableRecognizing Notes Receivable
Here are the entries to record the note on March 1, and the settlement on May 30, 2004.Here are the entries to record the note on March 1, and the settlement on May 30, 2004.
Mar. 1 Notes Receivable 12,000 Sales 12,000
Sold goods in exchange for a 90-day note
May 30 Cash 12,270 Interest Revenue 270 Notes Receivable 12,000
Collected note and interest due
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Recording a Dishonored NoteRecording a Dishonored Note
On May 30, 2004, Matrix informs us that the company is unable to pay the note or interest.On May 30, 2004, Matrix informs us that the company is unable to pay the note or interest.
May 30 Accounts Receivable - Matrix 12,270 Interest revenue 270 Notes Receivable 12,000
To charge accounts receivable for dishonored note
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When a note receivable is outstanding at the end of an accounting period, the company
must prepare an adjusting entry to
accrue interest income.
When a note receivable is outstanding at the end of an accounting period, the company
must prepare an adjusting entry to
accrue interest income.
Recording End-of-Period Interest AdjustmentsRecording End-of-Period Interest Adjustments
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Recording End-of-Period Interest AdjustmentsRecording End-of-Period Interest Adjustments
On December 1, 2004, Matrix, Inc. purchased a copier for $12,000 from Office Supplies, Inc. Matrix issued a 9%
note due in 90 days in payment for the copier.
What adjusting entry is required on December 31, the end of the company’s accounting period?
On December 1, 2004, Matrix, Inc. purchased a copier for $12,000 from Office Supplies, Inc. Matrix issued a 9%
note due in 90 days in payment for the copier.
What adjusting entry is required on December 31, the end of the company’s accounting period?
$12,000 × 9% × 30/360 = $90
Dec. 31 Interest Receivable 90 Interest Revenue 90
To accrue interest on note
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Recording End-of-Period Interest AdjustmentsRecording End-of-Period Interest Adjustments
Days in December 31 Minus the date of the note 1 Day remaining in December 30 Days in January 31 Days in February 28 Days in March until maturity 1 Period of the note in days 90
Mar. 1 Cash 12,270 Interest Receivable 90 Interest Revenue 180 Notes Receivable 12,000
To record full payment of principal and interest
Recording collection on note at maturity.Recording collection on note at maturity.
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4. Disposing Receivables - Selling Receivables4. Disposing Receivables - Selling Receivables
Company
Factor Customers
Sell Receivables
Get cash after factoring fee
Pay the amount due
The seller can receive cash earlier and can pass the risk of bad debts to the factor.
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Selling ReceivablesSelling Receivables
Aug.15, TechCom sells $20,000 of its accounts receivable and is charged a 4% factoring fee.
Aug.15 Cash 19,200 Factoring Fee Expense 800
Accounts Receivable 20,000 Sold account receivable for cash, less 4% fee
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4. Disposing Receivables - Pledging Receivables4. Disposing Receivables - Pledging Receivables
Borrow money and pledge its receivables as security for the loan. Pledging receivables does not transfer the risk of bad debts to the lender because the borrower retains ownership of the receivables.
Company
Lender Customers
Borrow moneyPay the
amount due
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Pledging ReceivablesPledging Receivables
TechCom borrows $35,000 and pledges its receivables as security.
Aug.20 Cash 35,000 Note Payable 35,000
Borrow money with a note secured by pledging receivables
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This ratio provides useful information for evaluating how efficient management has
been in granting credit to produce revenue.
This ratio provides useful information for evaluating how efficient management has
been in granting credit to produce revenue.
Net sales Average accounts receivable Net sales Average accounts receivable
5. Decision Analysis - Accounts Receivable Turnover5. Decision Analysis - Accounts Receivable Turnover
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5. Decision Analysis - Supermarket5. Decision Analysis - Supermarket
1. Industry Characteristics High volume, Low profit margin Chain of stores
2. Key success factors Inventory control Store location decision
3. Companies for analysis Walmart Target
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6. Walmat & Target - Account Receivable Turnover6. Walmat & Target - Account Receivable Turnover
ART 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995
WMT 143 192 182 129 108 102
Target 10 9 7 8 11 15
Account Receivable Turnover
0
20
40
60
80
100
120
140
160
180
200
1999 2000 2001 2002 2003 2004 2005 2006
Year
Ac
co
un
t R
ec
eiv
ab
le T
urn
ov
er
WMT Target