Paul Zarowin.ppt

Paul Zarowin Receivables RCJ Chapter 8 (except 405-412) key Issues How receivables are used to raise cash Recourse vs. non-recourse sales Consequences of different methods on financial statements Role of receivables in earnings management Allowance Method  Using A/R to Raise Cash Sometimes companies have need to accelerate cash collections: Immediate cash needs Credit sales: the company is unwilling/unable to bear the cost of processing and collections of credit Imbalance in the cash cycle: days for payable (to suppliers) is shorter than days for receivables (from customers) Loan covenants may preclude the company from borrowings In such instances companies can use their A/R to raise cash: Assignment: Collateralized borrowing (A/R used as collateral) Factoring: Sale of Receivables Using A/R to Raise Cash: J.E. Assignment: collateralized borrowing DR Cash DR Finance charge/Interest expense CR Liability Factoring: sale of receivable DR Cash DR Loss* CR A/R (*) can be gain (CR) if cash A/R, but unlikely Note: different effects on assets vs. liabilities Recourse vs. Non-Recourse Is transaction a sale or a borrowing? Who bears risk of loss? How does this affect price of A/R? 3 Possible Cases Recognize a loss and a contingent liability (disclose in footnote, not on B/S) for the possibility of defaulted receivables. Recognize interest expense or finance charge and a recognized (on B/S) liability. Recognize a loss, but no required disclosure (of A/R sale), so can’t distinguish from ordinary collection. Not allowed. Example: P8-18 Entries for Sale and Borrowing Why DR AUA for non-recourse sale only? Effect of Cash Receipt on SCF #1 is really collateralized borrowing; cash is recorded as CFO, but should be CFF #2 is actual borrowing, so cash is CFF #3 is acceleration of collection, so cash is CFO (like collection) #1 overstates CFO, understates CFF, understates current liabilities and A/R (no effect on O/E) What is a Holdback? W