91Ó°ÊÓ

Shard Crockery Co. recognized the following events related to customer accounts receivable during \(2000 .\) At the start of the year, the firm reported gross accounts receivable of 22,000,000 dollars and an allowance for uncollectible accounts of \(\$ 2,000,000 dollars .1. Sales on credit totaled 60,000,000 dollars for the year. 2\. The company factored 18,000,000 dollars of its receivables to a financial institution and paid a fee of 700,000 dollars . 3\. Uncollectible customer accounts totaling 3,200,000 dollars were written off during the year. 4\. Based on an aging of its remaining accounts receivable at year-end, the company estimates that \)10 \%$ of its remaining receivables will ultimately be uncollectible. a. Determine the balance of accounts receivable (net of allowance) to be reported in Shard Crockery's balance sheet at the end of 2000 . b. Determine the effects of each of the events described above on the company's accounts receivable (net), total assets, revenues, and expenses. c. How would the factoring of accounts receivable during the year affect your calculation or interpretation of the company's accounts receivable collection period (if at all)? Discuss.

Step by step solution

01

Calculate the Initial Accounts Receivable and Sales on Credit

Begin by adding the gross accounts receivable at the start of the year, which were $22,000,000, with the sales on credit for the year, which were $60,000,000. This gives us a subtotal of $82,000,000.

02

Deduct Factored receivables and Write-offs

From the subtotal calculated in the previous step, deduct the receivables that were factored, that is $18,000,000, and the uncollectible accounts written off, that is $3,200,000. This gives a new subtotal of $60,800,000.

03

Calculate the Allowance for Uncollectible Accounts

We are told that the company estimates that 10% of its remaining receivables will ultimately be uncollectible. Therefore, we calculate 10% of the new subtotal, which is $6,080,000.

04

Deduct the Allowance from the Accounts Receivable

Finally, subtract the allowance for uncollectible accounts from the new subtotal of accounts receivable to get the net accounts receivable. This gives us a total of $54,720,000.

05

Determine the Effects on the Accounts

Net Accounts Receivable decreases by the amount of accounts factored, increases by the amount of sales on credit, and decreases by the amount of written off accounts. Total Assets decrease by the factoring fee and the amount of written off accounts. Revenues increase by the amount of the sales done on credit. Expenses increase by the factoring fee and the amount of accounts written off.

06

Impact of Factoring on Collection Period

The factoring does not affect the accounts receivable collection period as factoring is merely a financial transaction where the company sells off its receivables. It does not affect the time it takes for the company to collect receivables.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Allowance for Uncollectible Accounts

The allowance for uncollectible accounts is an essential part of accounting that estimates the portion of accounts receivable that a business expects will not be paid by customers. Establishing this allowance prepares a company to manage any uncollectible debts that might arise. In the case of Shard Crockery Co., an estimate was made that 10% of its remaining receivables could be uncollectible. This helps create a financial buffer, ensuring the company's financial records accurately reflect expected future cash flows. By setting up this allowance, the business does not wait until customers fail to pay to address potential losses. Instead, these possible losses are accounted for immediately, presenting a more realistic view of financial health on the balance sheet.

• Ensures accuracy in financial statements.
• Reflects prudent financial management.
• Helps in predicting future cash flows accurately.

Factoring of Receivables

Factoring of receivables is a financial process by which a company sells its accounts receivable to a third party known as a factor. The factor then collects payments from the company's customers. This strategy is often used to improve cash flow without taking on more debt. Shard Crockery Co. factored $18,000,000 of its receivables. They paid a fee for this service, which impacts total assets as this fee is recognized as an expense. Factoring improves liquidity by providing immediate cash but at the cost of reduced total assets. This process does not change how quickly customers pay their bills and hence does not alter the company’s accounts receivable collection period.

• Enhances immediate cash inflow.
• Involves a fee affecting the expense account.
• Does not change collection period duration.

Balance Sheet

The balance sheet is a financial statement that provides a snapshot of a company's financial condition at a specific point in time. It presents the company's assets, liabilities, and shareholders’ equity. For Shard Crockery Co., key adjustments were made to accounts receivable, reflecting any factoring activities and allowances for uncollectible accounts. By examining the gross and net values of accounts receivable, alongside the allowance for uncollectible accounts, stakeholders can attain an understanding of what the company truly expects to collect. This transparent reflection is crucial for making informed decisions. The net accounts receivable listed on the balance sheet ensures that stakeholders are informed about the actual expected resources at the company's disposal, offering a realistic view of financial stability.

• Clarifies the real accounts receivable figures.
• Shows potential liabilities and company obligations.
• Assists in assessing the company's financial health.