ORIE 3150 class notes September 23 2010

ORIE 3150 class notes September 23 2010 - 1 2 3

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ORIE 3150 Accounts Receivable September 23, 2010 A. Short-term liquid assets are financial assets, such as cash, accounts receivable, notes receivable, and short term investments, which all can be converted quickly to cash. B. There are at least three main management issues related to short-term liquid assets: 1. Managing cash needs during business cycles. 2. Setting credit policies. More generous: More sales, more bad debts. More rigorous/strict: Fewer sales, fewer bad debts. 3. Financing receivables. Accounts receivables are just like making short term loans to your customers. Jack Boehringer ’52, CEO of Boehringer Labs, Norristown, PA, in his talk in the Enterprise Engineering Seminar in 2005: “I’ve got a great accountant working on my accounts receivable, I was happy with 40 days, but the past 6 months, we are down to 37 days.” C. “Cash” consists of coin and currency on-hand, checks not yet deposited, and deposits in bank checking accounts, including any compensating balances. D. “Cash equivalents” are combined with cash on many companies’ balance sheets. Cash equivalents comprise bank certificates of deposit (CD’s), US Government securities, and any other security, but each must have a term or maturity date of ninety days or less. E. Accounts receivable are amounts owed by customers for sales or services. They are a current asset. To account for the unpleasant fact that some of a company’s customers will not pay their bills, we need to make adjustments to the accounts receivable. Why? 1. Direct charge-off - wait until you are sure the account will not be paid, then write off the account.
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