ACC 110 Chapter Notes - Chapter 6: Accounts Receivable, Income Statement, Financial Statement

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25 Apr 2012
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Chapter 6 continued
Writing off receivables
- Write offs have no impact on the net amount of accounts recievable which is (A/R allowance
for uncollectibles)
Comparisons of the two methods
- The direct writeoff method under accrual accounting cannot be applied as the direct write off
only recognizes an expense periods after the sale was made, therefore they are not recognized
in the same period. The % of credit sales and receivables provide a bad debt expense and report
accounts recievable at the amount that is expected to be collected.
- The need to use judgment to determine the amount of bad debt expense , the balance in the
allowance account and the decision to write off a specific account receivable can be exploited by
the manager to pursue their own benefits
Returns
- Returns are a contra revenue account because if a person returns an item, the sale has never
occurred therefore no revenue was earned, therefore it is deducted from revenue
- Revenue reported on the income statement is reported after returns have been deducted from
the revenue that is earned
- If returns are not recorded, the revenue would be overstated as a result of not taking account
the possibility therefore misleading stakeholders
Long term recievables
- If no interest is paid on a long term accounts receivable or if the interest rate that is charged is
below the market rate, the amount of revenue recognized and the recievable will be overstated
if the time value of money is ignored
- PVn,r = 1/(1+discount rate)^2 * amount on a/r
- The difference between the amount recognized as revenue and the actual cash received years
later is interest
- When the time value of money is taken into consideration, the sale is equal to the amount
received years later and then earning the remainder through interest by financing goods on the
transaction date and then earning the interest by financing the sale
Financial statement analysis issues
- Biased estimates/intentional errors allow managers to pursue their self interest
- Hidden reserves refer to the undisclosed accounting decisions made by managers to manage
earnings and other financial information with the intention of satisfying their self interests
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