ACG 2021Chapter 5Summary

Short-Term (Trading) Investments

3 Transactions› Initial purchase› Period End Adjustment› Sale of Investment

Reporting ST Investments

Year of Purchase› Balance Sheet

Market Value of Investment› Income Statement

Unrealized Gain or Loss Dividend Revenue (if received)

Year of Sale› Balance Sheet

Investment balance is removed -0-› Income Statement

Gain or Loss on Sale Based on Ending Market Value from previous period

Note Receivable

3 Transactions› Issuance of Note› Accrual of Interest› Collection of Note

Reporting Note Receivable

Year of Issuance› Balance Sheet

Note Receivable owed to Company Interest Receivable

› Income Statement Interest Revenue for Accrued Interest

Year of Collection› Balance Sheet

Note Receivable is collected -0- Interest Receivable is collected -0-

› Income Statement Interest Revenue for partial period

Accounts Receivable Represents Amount owed from Customers Allowance for Doubtful Accounts

› Contra- Asset Account› Represents Amount we Expect NOT to collect

from Customers Net Accounts Receivable or Net

Realizable Value› Accounts Receivable – Allowance for Doubtful

Accounts› Represents what we Expect to collect

Allowance for Doubtful Accounts

Matching Principle Requires Estimate› Expense: Amount of Sales NOT collected

Two Estimation Techniques:› % of Sales› Aging of Accounts Receivable

One Non-Estimation Technique› Direct-Write Off

% of Sales

Estimates the amount of the Expense› Amount of Credit Sales that we expect NOT

to collect› Once computed (Credit Sales x %)

Uncollectible Accounts Expense xxxxxx Allowance for Doubtful Accounts xxxxxxx

Aging of Receivables

Estimates the Amount of Receivables we expect NOT to collect› That is a definition of what?› Once Computed:

You have estimated the ENDING Balance of the Allowance for Doubtful Accounts

Determine the Beginning Balance Make the adjustment

Usually Uncollectible Accounts Expense xxxxxx Allowance for Doubtful Accounts xxxxxxx

Direct Write-offs

We know with Certainty that we won’t be collecting a certain account:

Reduce the Allowance Account & Reduce the Accounts Receivable

Account› Allowance for Uncollectible Accounts xxxxx› Accounts Receivable

xxxx

Ratios

Acid-Test› Similar to Current Ratio but….› (Cash + ST Investments + Accounts

Receivable) / Current Liabilities Day’s Sales in Receivable

› Average Accounts Receivable / Day’s Avg. Sales