15.516x Financial Accounting 02 Revenue Recognition / Allowances
Finding US companies’ financial statements Optional: Firms’ Financial Statements from SEC “EDGAR” ▪ Pick a company that interests you ▪ http://www.sec.gov/edgar/searchedgar/companysearch.html ▪ Recommended: Download 10-K ▪ Do not print 10-K – can be several hundred pages long ▪ Or, search for company’s investor relations website, e.g., “Tesla investor relations”
In the real world when you are analyzing a company: ▪ Recognize that judgments and estimates are being used ▪ Read revenue recognition footnote ▪ Compare it to how its peers are recognizing revenue ▪ Compare revenue to change in deferred revenue over time and with peers ▪ Think about what this means for the business decisions you face
Bad Debts
Two ways of accounting for bad debts: ▪ the Direct Method, and ▪ the Allowance Method：1. The percentage of sales method. 2. The aging method. 注意这里估计出的都是应该有的余额
Note: real firms use different terms in this and in other situations: ▪ Bad debt expense = Provision for uncollectible accounts ▪ Allowance for bad debt = Allowance for doubtful accounts
Direct Method:当发生坏账时才减少A/R，增加BDE
Allowance Method:先用 Allow. For Doubtful Accounts(Contra-asset) 预估坏账，在坏账实际发生时decrease A/R.
- The percentage of sales method: based on the percentage of credit sale
- The aging method: the longer you have not been paid, the less likely you are to be paid.
Two steps:
- Estimate bad debt: increase 'Allow. For Doubtful Accounts(Contra-asset)', decrease 'R/E'.
- Writes off A/R: decrease 'A/R', decrease 'Allow. For Doubtful Accounts(Contra-asset)'. A/R (net) = A/R (gross) – Allowance for doubtful accounts
What if ADA is underestimated when writes-off?
先按step2正常减少A/R 和 ADA (ADA会是负数)，再按Allouwance Method计算应该有多少ADA来调高ADA。
A/R Turnover = Revenue / Average Accounts Receivable (net) ▪ This ratio measures how quickly you collect cash on credit sales. If company has lots of credit revenue, but very low receivables, it collects cash on its revenues quickly. ▪ A bigger number indicates faster collections Days receivables = (1 / A/R Turnover) * 365 ▪ Days receivable inverts the A/R Turnover calculation. This ratio measures the number of days that it takes a company to collect payment after a sale. ▪ A smaller number indicates faster collections.
Liability for Return Allowances (Liability account)
Two Steps:
- 根据预测的return数量 increase 'Allowance for returns', decrease 'R/E'
- 根据实际return数量 reduce 'A/R', reduce 'Allowance for returns'
