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Chapter 25 / Exercise 9
Financial Markets & Institutions
Madura
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CHAPTER 8 ACC/291 1. How can companies manage credit accounts effectively to minimize losses? 2. What kind of credit policies should businesses implement to keep customers buying while increasing their receivables turnover rate? LEARNING OBJECTIVE 1 Explain how companies recognize accounts receivable. TYPES OF RECEIVABLES The relative significance of a company's receivables as a percentage of its assets depends on various factors: its industry, the time of year, whether it extends long term financing, and its credit policies. To reflect important differences among receivables, they are frequently classified as (1) accounts receivable, (2) notes receivable, and (3) other receivables. Accounts receivable are amounts customers owe on account. They result from the sale of goods and services. Companies generally expect to collect accounts receivable within 30 to 60 days. They are usually the most significant type of claim held by a company. Notes receivable are a written promise (as evidenced by a formal instrument) for amounts to be received. The note normally requires the collection of interest and extends for time periods of 60–90 days or longer. Notes and accounts receivable that result from sales transactions are often called trade receivables . Other receivables include nontrade receivables such as interest receivable, loans to company officers, advances to employees, and income taxes refundable. These do not generally result from the operations of the business. Therefore, they are generally classified and reported as separate items in the balance sheet. Receivables are claims that are expected to be collected in cash. The management of receivables is a very important activity for any company that sells goods or services on credit. Receivables are important because they represent one of a company's most liquid assets. For many companies, receivables are also one of the largest assets. When a merchandiser sells goods, it increases (debits) Accounts Receivable and increases (credits) Sales Revenue. LEARNING OBJECTIVE 2
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Chapter 25 / Exercise 9
Financial Markets & Institutions
Madura
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Describe how companies value accounts receivable and record  their disposition. VALUING ACCOUNTS RECEIVABLE Once companies record receivables in the accounts, the next question is: How should they report receivables in the financial statements? Companies report accounts receivable on the balance sheet as an asset. Determining the amount to report is sometimes difficult because some receivables will become uncollectible The seller records these losses that result from extending credit as Bad Debt Expense . Such losses are a normal and necessary risk of doing business on a credit basis. Two methods are used in accounting for uncollectible accounts: (1) the direct write off method and (2) the allowance method. We explain both methods in the following sections. ALTERNATIVE TERMINOLOGY You will sometimes see Bad Debt Expense called Uncollectible Accounts Expense . Direct Write Off Method for Uncollectible Accounts Under the direct write‐off method

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