ACCT 200 1st Edition Lecture 11 Outline of Last Lecture II. Types of ReceivablesIII. Accounts ReceivableIV. Notes Receivable Outline of Current Lecture V. Notes Receivable ContinuedVI. Statement Presentation of ReceivablesVII. Managing ReceivablesCurrent LectureReporting and Analyzing ReceivablesChapter 8 ContinuedAccrual of interest receivable- before maturity- Illustration: Suppose instead that Wolder Co. prepares financial statements as of September 30. The adjusting entry by Wolder is for four months ending September 30.o Sept. 30 Interest receivable 300Interest revenue 300Accrual of interest receivable- paid at maturity- Illustration: prepare the entry Wolder Co. would make to record the honoring of the Higley note on November 1o Nov. 1 Cash 10375N/R 10,000Interest Rec 300Interest Rev 75Financial Statement PresentationEvaluating liquidity of receivables- Accounts receivable turnover (1st)o Assess the liquidity of the receivableso Measure the number of times, on average, a company collects receivables duringthe period- Average collection period:These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.o Used to assess effectiveness of credit and collection policieso Collection period should not exceed credit term periodManaging ReceivablesManaging accounts receivable involves five steps:- Determine to whom to extend credit- Establish a payment period- Monitor collections- Evaluate the liquidity of receivables- Accelerate cash receipts from receivables when necessaryExtending credit- If the credit policy is too tight, you will lose sales- If the credit policy is too loose, you may sell to customer who will pay either very late or not at all- It is important to check references on potential new customers as well as periodically to check the financial health of continuing customersEstablishing a payment period- Companies should determine a required payment period and communicate that policy to their customers- The payment period should be consistent with that of competitorsMonitoring Collections- Companies should prepare an accounts receivable aging schedule at least monthlyo Helps managers estimate the timing of future cash inflowso Provides information about the collection experience of the company and identifies problem accounts- Significant concentrations of credit risk must be discussed in the notes to its financial statementsAccelerating cash receipts- Three reasons for the sale of receivables:o Sizeo Companies may sell receivables because they may be the only reasonable source of casho Billing and collection are often time-consuming and costlySale of receivables to a factor- A factor is a finance company or bank that buys receivables from businesses for a fee and then collects the payments directly from the customers- Illustration: Assume that Hendredon Furniture factors $600,000 of receivables to FederalFactors, Inc. Federal Factors assesses a service charge of 2% of the amount of receivablessold.o Cash 588,000Service Charge 12,000Accounts Receivable 600,000National credit card sales- Three parties involved when credit cards are usedo Credit card usero Retailero Customer- The retailer pays the credit card issuer a fee of 2% to 4% of the invoice price for its