Review the five steps on Managing Receivables discussed in Learning Objective 7 in Chapter 8. Consider a scenario in your company or in the examples in the textbook where one of these steps is grossly ignored. Evaluate the possible results of this failure and suggest a corrective action. Be specific in your suggestions. Generalizations will not demonstrate your understanding of the role of each of these five steps.
LEARNING OBJECTIVES REVIEW Explain how companies recognize accounts receivable. Receivables are frequently classified as accounts, notes, and other. Accounts receivable are amounts customers owe on account. Notes receivable represent claims that are evidenced by formal instruments of credit. Other receivables include nontrade receivables such as interest receivable, loans to company officers, advances to employees, and income taxes refundable. Companies record accounts receivable when they perform a service on account or at the point‐of‐sale of merchandise on account. Sales returns and allowances and cash discounts reduce the amount received on accounts receivable. Describe how companies value accounts receivable and record their disposition. The two methods of accounting for uncollectible accounts are the allowance method and the direct write‐off method. Under the allowance method, companies estimate uncollectible accounts as a percentage of receivables. It emphasizes the cash realizable value of the accounts receivable. An aging schedule is frequently used with this approach. Explain how companies recognize, value, and dispose of notes receivable. The formula for computing interest is Face value of note×Annual interest rate×Time in terms of one yearFace value of note×Annual interest rate×Time in terms of one yearFace value of note×Annual interest rate×Time in terms of one year. Notes can be held to maturity, at which time the borrower (maker) pays the face value plus accrued interest and the payee removes the note from the accounts. In many cases, however, similar to accounts receivable, the holder of the note speeds up the conversion by selling the receivable to another party. In some situations, the maker of the note dishonors the note (defaults), and the note is written off. Describe the statement presentation of receivables and the principles of receivables management. Companies should identify each major type of receivable in the balance sheet or in the notes to the financial statements. Short‐term receivables are considered current assets. Companies report the gross amount of receivables and the allowance for doubtful accounts. They report bad debt and service charge expenses in the income statement as operating (selling) expenses, and interest revenue as other revenues and gains in the nonoperating section of the statement. To properly manage receivables, management must (a) determine to whom to extend credit, (b) establish a payment period, (c) monitor collections, (d) evaluate the liquidity of receivables, and (e) accelerate cash receipts from receivables when necessary. The accounts receivable turnover and the average collection period both are useful in analyzing management's effectiveness in managing receivables. The accounts receivable aging schedule also provides useful information. If the company needs additional cash, management can accelerate the collection of cash from receivables by selling (factoring) its receivables or by allowing customers to pay with bank credit cards.
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