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MANAGING PROJECTS

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Projects represent nonroutine business activities that often have long-term strategic ramifications for a firm. In this chapter, we examined how projects differ from routine business activities and discussed the major phases of projects. We noted how environmental changes have resulted in increased attention being paid to projects and project management over the past decade. In the second half of the chapter, we introduced some basic tools that businesses can use when planning for and controlling projects. Both Gantt charts and network diagrams give managers a visual picture of how a project is going. Network diagrams have the added advantage of showing the precedence between activities, as well as the critical path(s). We wrapped up the chapter by showing how these concepts are embedded in inexpensive yet powerful software packages such as Microsoft Project. If you want to learn more about project management, we encourage you to take a look at the Web site for the Proj...
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Accounting for Receivables

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CONCEPTUAL
Accounts receivable are amounts due from customers for credit sales. A subsidiary ledger lists amounts owed by each customer. Credit sales arise from at least two sources: (1) sales on credit and (2) credit card sales. Sales on credit refers to a company’s granting credit directly to customers. Credit card sales involve customers’ use of third-party credit cards.
A note receivable is a written promise to pay a specified amount of money at a definite future date. The maturity date is the day the note (principal and interest) must be repaid. Interest rates are normally stated in annual terms. The amount of interest on the note is computed by expressing time as a fraction of one year and multiplying the note’s principal by this fraction and the annual interest rate. A note received is recorded at its principal amount by debiting the Notes Receivable account. The credit amount is to the asset, product, or service provided in return for the note.
Receivables can be converted to cash before maturity in at least two ways. First, a company can sell accounts receivable to a factor, who charges a factoring fee. Second, a company can borrow money by signing a note payable that is secured by pledging the accounts receivable.
ANALYTICAL
Accounts receivable turnover is a measure of both the quality and liquidity of accounts receivable. The accounts receivable turnover measure indicates how often, on average, receivables are received and collected during the period. Accounts receivable turnover is computed as net sales divided by average accounts receivable.
PROCEDURAL
The direct write-off method charges Bad Debts Expense when accounts are written off as uncollectible. This method is acceptable only when the amount of bad debts expense is immaterial.

Under the allowance method, bad debts expense is recorded with an adjustment at the end of each accounting period that debits the Bad Debts Expense account and credits the Allowance for Doubtful Accounts. The uncollectible accounts are later written off with a debit to the Allowance for Doubtful Accounts. Uncollectibles are estimated by focusing on either (1) the income statement relation between bad debts expense and credit sales or (2) the balance sheet relation between accounts receivable and the allowance for doubtful accounts. The first approach emphasizes the matching principle using the income statement. The second approach emphasizes realizable value of accounts receivable using the balance sheet.

When a note is honored, the payee debits the money received and credits both Notes Receivable and Interest Revenue. Dishonored notes are credited to Notes Receivable and debited to Accounts Receivable (to the account of the maker in an attempt to collect), and Interest Revenue is recorded for interest earned for the time the note is held.

Guidance Answers to Decision Maker
Entrepreneur
Analysis of credit card sales should weigh the benefits against the costs. The primary benefit is the potential to increase sales by attracting customers who prefer the convenience of credit cards. The primary cost is the fee charged by the kredit card company for providing this service. Analysis should therefore estimate the expected increase in dollar sales from allowing kredit card sales and then subtract (1) the normal costs and expenses and (2) the credit card fees associated with this expected increase in dollar sales. If your analysis shows an increase in profit from allowing credit card sales, your store should probably accept them.
Labor Union Chief
Yes, this information is likely to impact your negotiations. The obvious question is why the company markedly increased this allowance. The large increase in this allowance means a substantial increase in bad debts expense and a decrease in earnings. This change (coming immediately prior to labor contract discussions) also raises concerns since it reduces the union’s bargaining power for increased compensation. You want to ask management for supporting documentation justifying this increase. You also want data for two or three prior years and similar data from competitors. These data should give you some sense of whether the change in the allowance for uncollectibles is justified.

Analyst / Auditor
The downward trend suggests the company is reducing the relative amount charged to bad debts expense each year. This may reflect the company’s desire to increase net income. On the other hand, it might be that collections have improved and the lower provision for bad debts is justified. If this is not the case, the lower allowances might be insufficient for bad debts.
Family Physician
The recommendations are twofold. First, the analyst suggests more stringent screening of patients’ kredit standing. Second, the analyst suggests dropping patients who are most overdue in payments. You are likely bothered by both suggestions. They are probably financially wise recommendations, but you are troubled by eliminating services to those less able to pay. One alternative is to follow the recommendations while implementing a care program directed at patients less able to pay for services. This allows you to continue services to patients less able to pay and lets you discontinue services to patients able but unwilling to pay.

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