Monday, June 17, 2024
Sunday, June 16, 2024
Saturday, June 15, 2024
Friday, June 14, 2024
Accounting: The Language of Business - Vol. 2 (Intermediate: Part 149)
Short-Term Operating Assets: Cash and Receivables (Part N)
by
Charles Lamson
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Disclosures for Accounts Receivable and Notes Receivable
Companies disclose a summary of significant accounting policies relating to accounts receivable and notes receivable in the notes to the financial statements. The disclosures for receivables include accounting policies and the methodology used to estimate the allowance for uncollectible accounts such as a description of the elements that influence management's judgment and credit accounts, such as a description of the elements that influence management's judgment and credit risk. Companies also provide a description of the policy for writing off uncollectible receivables. Companies commonly report net receivables on the balance sheet and disclose gross receivables and the allowance for uncollectible accounts in the notes to the financial statements. For the allowance, companies disclose activity during the year such as:
When a company has pledged (Pledging accounts receivable, or receivables, is when a business uses unpaid invoices, or accounts receivable balance, as collateral for a loan from a bank or lender. This can be a useful way for businesses to manage cash flow issues and get quick cash.) , assigned (Assigned accounts receivable is a type of business financing agreement where a company uses its outstanding invoices as collateral to borrow money from a lender. The company, or borrower, retains ownership of the accounts receivable and is responsible for collecting payments from customers. The borrower then uses those payments to repay the loan, plus interest and other fees. If the borrower defaults on the loan, the lender can collect the assigned receivables.), or factored (Factoring accounts receivable, also known as invoice factoring, is a financial practice where a company sells its unpaid invoices to a third party, called a factor, for cash. The factor then collects payment from the customer and pays the company a percentage of the invoice value as an advance, minus a factoring fee. The factoring fee typically includes a discount fee and a service fee. The discount fee is the cost of financing, while the service fee is a flat fee for administrative services. The price paid for the receivables is usually discounted from their face amount to account for the possibility that some of the receivables may not be collectible.) any accounts receivable, it must provide detailed disclosures of the amounts, terms, and collateral. Exhibit 9.8 provides an example of Kellogg Company's accounts receivable disclosures. Kellogg provides a table showing all its accounts receivables, composed primarily of trade receivables, of $1,106 million and $1,169 million in fiscal 2016 and 2015, respectively. Another table provides the changes from the beginning balance to the ending balance for the allowance for doubtful accounts.  EXHIBIT 9.8 Accounts Receivable Disclosures, Kellogg Company, Financial Statements, December 31 2016 %20(1)%20(1)%20(2)%20(3)%20(2)%20(9)%20(2).jpg)  *GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 468* end |
Thursday, June 13, 2024
Wednesday, June 12, 2024
Tuesday, June 11, 2024
Monday, June 10, 2024
Sunday, June 9, 2024
Keeping Commitments
Keeping commitments can be important for personal and professional success. It can mean doing what you say you'll do, when you say you'll do it, and respecting others' time and work. It can also mean taking responsibility, and giving your all.
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Accounting: The Language of Business - Vol. 2 (Intermediate: Part 148)
- You cannot serve God and money (Matthew 6:24)
Short-Term Operating Assets: Cash and Receivables (Part M)
by
Charles Lamson
No Stated Interest Rate or Stated Interest Rate Less Than the Market Rate
When there is no interest rate stated or the stated interest rate is less than the market interest rate, the face value of a note receivable no longer provides a valid measure of its present value. In this case, a company records the note at its present value rather than its face value. There are two approaches to measure present value:
The difference between the face value of the note and the fair value of the goods and services provided or the present value of the note is a discount, which represents the deferred interest revenue to be earned over the note's life. The firm initially records deferred interest revenue as a discount on notes receivable (a contra-asset account) and then amortizes the amount to interest revenue over the loan term. Example 9.13 shows accounting for a note with no stated interest rate. %20(1)%20(1)%20(2)%20(3)%20(2)%20(1)%20(1).jpg) %20(1)%20(1)%20(2)%20(3)%20(2)%20(2)%20(1).jpg)  In this example, Fitzgerald collected the note before the end of its fiscal year. However, if the note is still outstanding when the company prepares financial statements, it must record interest on the loan as shown in Example 9.14. %20(1)%20(1)%20(2)%20(3)%20(2)%20(3).jpg) %20(1)%20(1)%20(2)%20(3)%20(2)%20(4)%20(1).jpg) Financing with Notes Receivable. In a manner similar to accounts receivable, companies can sell notes receivable to secure immediate cash. A company sells a note receivable by transferring it to another party before the maturity date. Selling a note receivable is typically referred to as discounting. The accounting approach for selling or discounting a note receivable is similar to factoring accounts receivable as illustrated in Example 9.15. If the conditions are met to consider the transaction a sale, the company removes the receivable from the books and reports a gain or loss. One difference in accounting for the sale of a note receivable versus an account receivable is that notes receivable earn interest. Therefore, the company must accrue any interest that has been earned but not received as of the time the note is sold. %20(1)%20(1)%20(2)%20(3)%20(2)%20(5).jpg) %20(1)%20(1)%20(2)%20(3)%20(2)%20(7)%20(1).jpg) *GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 465-467* end |
Saturday, June 8, 2024
Friday, June 7, 2024
Thursday, June 6, 2024
Wednesday, June 5, 2024
Tuesday, June 4, 2024
Monday, June 3, 2024
Attending to the Little Things
ATTENDING TO THE LITTLE THINGS: The little kindnesses and courtesies are so important. Small discourtesies, little unkindnesses, little forms of disrespect make Iarge withdrawals. In relationships, the little things are the big things.
Sunday, June 2, 2024
Saturday, June 1, 2024
Accounting: The Language of Business - Vol. 2 (Intermediate: Part 147)
Short-Term Operating Assets: Cash and Receivables (Part L)
by
Charles Lamson
Accounting for Short-Term Notes Receivable
This post introduces the key features of notes receivable and reviews the accounting message used to record notes receivable, which depend on whether the stated interest rate is at or below the market interest rate. A detailed discussion of this will be provided in a future part covering investing assets. Basic Features of Notes Receivable A note receivable is a formal kind of written promise to receive a fixed sum of money at a specified date (or dates) in the future, usually with a stated interest rate. The fixed sum of money that will be received at a specified date in the future is the face value of the note receivable. Notes receivable are classified as current or non-current on the balance sheet based on the expected collection date. Notes originate from either trade or nontrade transactions. Nontrade notes receivable include loans made to officers or employees and special financing arrangements with customers or vendors. Notes receivable can be interest bearing or non-interest bearing---but all notes include an interest element. The holder of an interest-bearing note receives periodic interest over the low term. Conversely, the holder of a non-interest-bearing note does not receive periodic interest over the term of the note. When a company accepts a note in exchange for goods and services, the note may have a stated rate of interest, may not specify an interest rate, or may have a stated rate of interest that is significantly different than the current market rate. The stated rate is the interest rate that the holder of the note will receive and is expressed as an annual rate. The market rate is the interest rate on a similar investment in the market. Regardless of the note's stated interest rate, companies always report the note receivable at the present value of the future cash flows discounted at the market rate on the balance sheet. Similarly, if the note does not specify an interest rate, the note receivable is reported at the present value of the future cash flows discounted at the market rate. Interest is recorded on the note over its life by the amortization of a discount. [Amortization of a discount is a non-cash expense that gradually reduces a discount over time. It's a process that can apply to notes payable and bonds payable:
Next, we present the accounting for a note receivable with a stated interest rate equal to the market interest rate. Then, we discuss accounting for a note with a stated interest rate that is below the market interest rate.  Stated Interest Rate Equal to the Market Rate When short-term notes are interest bearing at the current market rate of interest when issued, the face amount of the note is the same as its present value. In this case, the company records the note at its face value and interest accrues over the life of the note as illustrated in Example 9.12. %20(1)%20(1)%20(2)%20(2).jpg) %20(1)%20(1)%20(2)%20(3)%20(1).jpg) *GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 464-465* end |
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Measurement Methods by Charles Lamson There are two major measurement methods: counting and judging. While counting is preferre...
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Product Life Cycles by Charles Lamson Marketers theorize that just as humans pass through stages in life from infancy to death,...
