ACCT 200 1st Edition Lecture 11 Outline of Last Lecture II Types of Receivables III Accounts Receivable IV Notes Receivable Outline of Current Lecture V Notes Receivable Continued VI Statement Presentation of Receivables VII Managing Receivables Current Lecture Reporting and Analyzing Receivables Chapter 8 Continued Accrual 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 300 Interest revenue 300 Accrual of interest receivable paid at maturity Illustration prepare the entry Wolder Co would make to record the honoring of the Higley note on November 1 o Nov 1 Cash 10375 N R 10 000 Interest Rec 300 Interest Rev 75 Financial Statement Presentation Evaluating liquidity of receivables Accounts receivable turnover 1st o Assess the liquidity of the receivables o Measure the number of times on average a company collects receivables during the 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 policies o Collection period should not exceed credit term period Managing Receivables Managing 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 necessary Extending 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 customers Establishing 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 competitors Monitoring Collections Companies should prepare an accounts receivable aging schedule at least monthly o Helps managers estimate the timing of future cash inflows o 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 statements Accelerating cash receipts Three reasons for the sale of receivables o Size o Companies may sell receivables because they may be the only reasonable source of cash o Billing and collection are often time consuming and costly Sale 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 Federal Factors Inc Federal Factors assesses a service charge of 2 of the amount of receivables sold o Cash 588 000 Service Charge 12 000 Accounts Receivable 600 000 National credit card sales Three parties involved when credit cards are used o Credit card user o Retailer o Customer The retailer pays the credit card issuer a fee of 2 to 4 of the invoice price for its services