Introduction to Financial Accounting Chapter 5.ppt

* Net accounts receivables decline for two of these events. First, as we estimate future bad debts, we recognize the likelihood that we will not collect cash for some accounts. Second, once the company receives payment from customers, their account balances are no longer receivable. On the other hand, writing off actual bad debts and re-establishing those previous write-offs when it appears that customers will pay, has no effect on net accounts receivable. Notice that the balance of the allowance account is $2 million at the end of 2013. Does the fact that the allowance account has a nonzero ending balance mean that Kimzey’s estimate of uncollectible accounts for 2013 was wrong? Perhaps. On the other hand, it may mean only that some of the $15 million in accounts receivable has not yet proven uncollectible but eventually will. In any case, when we make estimates in accounting, it’s highly unlikely they will prove exactly correct. Users of financial statements must realize that some of the amounts reported in financial statements are estimates, and estimating the future almost always results in some inaccuracy. * Notice that the balance before the year-end adjustment in this example is a $2 million credit. A credit balance before adjustment indicates that last year’s estimate of uncollectible accounts may have been too high. However, it’s possible that some of the estimated uncollectible accounts have not proven bad yet. A debit balance before adjustment indicates that last year’s estimate was too low. * Based on all available information at the end of 2013, Kimzey estimates that the allowance for uncollectible accounts should be $9 million. This means the allowance account needs to increase from its current balance of $2 million credit to the estimated ending balance of $9 million credit. Kimzey can accomplish this by adjusting the account for $7 million. * In its 2013 income statement, Kimzey will report bad debt expense of $7 million along with other operating e