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ACC 100 Chapter Notes - Chapter 7: Income Statement

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magentabee868
21 Apr 2017
School
Ryerson University
Department
Accounting
Course
ACC 100
Professor
Maurizio Di Maio

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Document Summary

If the estimate is based on historical data and there is an economic slowdown in the following period. If a company"s revenues have increased, resulting in a higher amount of outstanding a/r balances. If the business does not follow up with and remind their customers on a regular basis: when a company believes a customer will not pay their outstanding balance, a/r must be written off. Allowance method = consists of decreasing allowance for doubtful accounts and increasing bad. Debt expense: allowance for doubtful accounts (afda) = a contra-asset account that measures the amount of a/r that the business estimates it will never collect in cash, bad debt expense = the cost of selling. Net realizable value = the amount of a/r that the business estimates it will collect in cash in the future: net realizable value = a/r - afda. The balance sheet would now look like the following:

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Related Questions

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The major advantage of extending credit sales is that it willincrease sales revenue. This is because customers who can't producecash today are still able to buy the good or service of theirchoice.

Extending credit sales is usually a good idea for businesses,but there are a few important factors to consider. First, thebusiness needs sufficient cash flow to account for Cost of GoodsSold (inventory). Customers' payments may delayed, but suppliersstill have to get paid on time. Thus, the business has to be keenlyaware of its cash levels.

This is especially true for businesses that sell large durablegoods at low volumes, like airplane engines. If a customer isunable to pay its debt, this bad debt may have a big affect on cashlevels available for suppliers and investment in otheractivities.

The most important factor to consider when deciding whether tooffer credit sales is the anticipated bad debt expense. This is thepercentage of credit sales that are not ultimately paid. Thebusiness will be forced to eventually write this off against theaccount receivables balance (credit). This may lead to a lowercredit rating. A smaller account receivable balance, which isconsidered liquid, is not good if you wish to borrow against thatbalance (secured borrowing).

Ultimately, a business has to decide whether 1) the increase insales revenue will be greater than the bad debt expense arisingfrom extending credit to customers; and 2) whether the increase insales revenue is sufficient to account for reduced and/or delayedcash flows.

It therefore goes without saying that the credit worthiness ofcustomers should be evaluated before deciding to lend. Backgroundchecks and credit scores should be reviewed. The goal of course tominimize any future bad debt expense.

Jackson Automotive Systems produces automotive parts foradvanced heating and air conditioning systems, engine coolingsystems, fuel injection and transfer systems, and various otherengine parts and it supplies them to the automotive industryprimarily in Michigan. Like many OEM suppliers for the automotiveindustry, Jackson cut back production following the financialcrisis in 2008. By 2013, the firm is back to operating at capacity.The company experiences a bottleneck in production of some keyelectronic components and, as a result, is unable to repay itsoutstanding debt to the bank. In addition, the firm delayedreplacing equipment during the downturn and now must replace agingequipment to avoid future production delays. The presidentapproaches the bank for an extension to repay a loan and for anadditional loan to cover the new equipment purchase. Before meetingwith the loan committee, the president must prepare a presentationon the firm's financial position

Brief Cases from Haevard Business School

JACKSON AUTOMOTIVE
Cash BudgetFormat
June July August September October
Projected Sales $ 12,681.00 $ 7,374.00 $ 7,201.00 $ 7,394.00
Beginning Cash Balance $ 4,994 This was given in the Balance Sheet--May 2013 cashbalance
CashReceipts:
Collection of AccountsReceivable Sales are collected in the following month.
Interest Income 2% of the cash balance
Bank Loan Amount borrowed
Total Cash Inflow Total of cash inflows
CashDisbursements
Payments of AccountsPayable Payable in the month followng thepurchase.
Operating Expenses Given at 750 per month
Capital Expenditures Purchase new equipment in July
Tax Payments Quarterly--paid in June and September
Interest Payments 6% of outstanding loan
Principal Payments Due in September for both loan
Dividend Payments Paid in September
Total Cash Outflow Total of cash disbursements
Net Cash Inflow (outflow) Difference between cash inflows minus cashoutflows
Ending Cash Balance Beginning cash + net cash inflow

Tony Star formed a lawn service business as a summer job in California. To start the business on Sept 1, 2017, he deposited $1,000 in a new bank account in the name of the business. The $1,000 consisted of a $600 loan from Bank One to his company, Star Lawn Mowing Service, and $400 of his own money. The company issued $400 of capital to Star. Star rented lawn equipment, purchased supplies, and hired other students to mow and trim customers’ lawns.

At the end of each month, Star mailed bills to the customers. On December 31, he was ready to dissolve the business and return to university in January 2018. Because he was so busy, he kept few records other than the check book and a list of receivables from customers.

At December 31, the business’s check book shows a balance of $2,000, and customers still owe $750. During the summer, the business collected $5,500 from customers. The business check book lists payments for supplies totalling $400, and it still has supplies that cost a total of $50. The business paid employees $1,800 and still owes them $300 for the final week of the summer.

Star rented some equipment from Lamberg’s Mower Shop. On September 1, the business signed a six-month rental agreement on mowers and paid $600 for the full rental period in advance. Lamberg’s will refund the unused portion of the prepayment if the equipment is returned in good shape. In order to get the refund, Star has kept the mowers in excellent condition. In fact, the business had to pay $300 to repair a mower.

To transport employees and equipment to jobs, Star used a van that the business bought for $300. The business estimates that the summer’s work used up one-third of the van’s service potential. The business check book lists a payment of $500 for cash withdrawals during the summer. The business paid the loan back during August. (Ignore any interest expense associated with the loan.)

Required:

Prepare the income statement and the statement of owner’s equity of Star Lawn Mowing Service for the four months starting September 1 through December 31, 2017. Subsequently prepare the balance sheet of Star Lawn Mowing Service at December 31, 2017.