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BUSI 1003 (12)
Chapter 6

Chapter 6

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BUSI 1003
Patti Proulx

Chapter 6 - Receivables and Inventories ● Receivables - Result from sales on account. Includes all money claims against other entities including people, companies, and other organizations. Receivables are usually a significant portion of the total current assets. ○ Accounts Receivable - Selling merchandise or services on account. It is recorded as an increase in Accounts Receivable. Normally collected in a short period like 30 days. Classified as a current asset ○ Notes Receivable - Amounts that customers owe for which a formal, written instrument of credit has been issued (loan). If note is expected to be collected within a year it is recorded as a current asset. ■ Advantages: By signing a note the debtor recognizes the debt and agrees to pay it according to its terms. Thus, a note is a stronger legal claim ○ Promissory Note Receivable - A written promise to pay the face amount usually, with interest, on demand or at a later date in the future ■ Characteristics of promissory note: ● The maker is the party making the promise to pay ● The payee is the party to whom the note is payable ● The face amount is the amount the note is written for on its face ● The issuance date is the date a note is issued ● The due date or maturity date is the date the note is to be paid ● The term of a note is the time between its issuance and due date ● The interest rate is the rate of interest that must be paid on the face amount for the term of the note ● Interest = Face amount x Interest Rate x (Term/365 days) or ● Interest = Face amount x Interest Rate x (Term/12 months) ● Maturity Value - The amount that must be paid at the due date of the note, which is the sum of the face amount and the interest. ● Other Receivables: ○ Includes; interest receivable, taxes receivable and receivables for company officers staff and employees ○ Normally reported separately on the balance sheet ○ If they are expected to be collected within one year they are classified as current assets. If they are to be collected beyond one year they are classified as noncurrent assets and recorded under investments ● Uncollectible Receivables - Some customers don’t pay so the accounts receivable will be uncollectable ○ May shift the risk of accounts receivable to other companies. Ex. only let people purchase with credit card so the risk is on the credit card companies ○ May sell their receivables. Selling receivables is called factoring , the buyer of the ○ receivable is called the factor. The advantage of factoring is the company selling the receivable immediately gets cash for operating and other needs. The risk is then shifted to the factor ○ Bad Debt Expense - The operating expense recorded for uncollectable receivables ○ There is no general rule for when an account becomes uncollectible. Some indications that the debt may be uncollectible include:
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