Cash and Receivables
0REVIEWING THE CHAPTER
Objective 1: Identify and explain the management and ethical issues related to cash and
To maintain adequate liquidity, management must carefully monitor its cash and
receivables. To accomplish this, it must address five key issues: managing cash needs,
setting credit policies, evaluating the level of accounts receivable, financing receivables,
and making ethical estimates of credit losses.
consists of currency and coins on hand, checks and money orders from customers, and
deposits in checking and savings accounts. Cash may also include a
the minimum amount a bank requires a company to keep in its bank account as part of a
During the course of a year, most businesses experience periods of both strong and weak
sales and variations in cash flow. To remain liquid throughout these seasonal cycles, a
business must carefully plan for cash inflows, cash outflows, borrowing, and investing.
Excess cash, for example, must be invested wisely, while providing for access when needed.
On the other hand, periods of cash shortages must be anticipated so that short-term
borrowing (or other means of obtaining funds) can be arranged in advance.
A company must use its assets to maximize income while maintaining liquidity.
are assets that arise from cash transactions, the investment of cash, and the
extension of credit. Examples are cash, accounts receivable, and notes receivable.
are short-term financial assets of a wholesaler or retailer that represent
payment due from credit customers. This type of credit is often called
Installment accounts receivable
are receivables that will be collected in a series of
payments; they usually are classified on the balance sheet as current assets. When loans or
credit sales are made to a company’s employees, officers, or owners, they are shown
separately on the balance sheet with a title like “receivables from employees” rather than
“assets receivable.” Accounts Receivable should appear on the balance sheet as the sum of
all accounts with debit balances. Customers’ accounts sometimes show credit balances
because of overpayment; the sum of the credit balances should appear on the balance sheet
as a current liability.
Companies that sell on credit do so to be competitive and to increase sales. To minimize the
risk of incurring bad debts, they establish policies and procedures for checking the financial
backgrounds of potential credit customers. The effectiveness of a company’s credit policies
is commonly measured by the
(net sales divided by average accounts
receivable) and the
days’ sales uncollected
(365 divided by the receivable turnover).