Chapter 7: Cash and Receivables

Short term receivables are reported at their net realizable value (NRV)

• Short term receivables are reported at their net realizable value (NRV)
• The NRV is the net amount expected to be collected
• The NRV is gross accounts receivable less estimated non-collectible accounts.

• Valuation of Accounts Receivable

• Comparison of Methods for Estimating Uncollectibles

• Methods

• Direct Write-Off

• Allowance

• Not based on the matching Based on the matching
• principle principle

• Appropriate only if Must be followed if
• amounts are not material amounts are material

• Accounts are written off Estimated bad debts are
• when determined non-collectible matched against revenue

• Estimating Non-collectable Receivables

The estimate of non-collectible accounts may be based on:

• The estimate of non-collectible accounts may be based on:
• Sales (or net sales), known as the Income statement approach, or
• Accounts receivable balance, known as the Balance sheet approach.

• Estimating Non-collectable Accounts: The Allowance Method

Short-term accounts receivable are shown at their net realizable value as follows:

• Short-term accounts receivable are shown at their net realizable value as follows:
• Accounts Receivable (gross): $ XXX less: Allowance: ($ XX) Net Realizable Value: $ XX

• Balance Sheet Representation

Recognition of Notes Receivable

• Recognition of Notes Receivable
• may be issued at face value or not at face value
• may be issued for cash/non-cash consideration
• Valuation issues
• Disposition of notes receivable

• Notes Receivable: Issues

• Notes Receivable

• Short term N/R

• Long term N/R

• Record at face value
• less allowance

• Record at present value
• of cash expected to
• be collected

• Recognition of Notes Receivable