Chapter 7 - Financial Accounting Chapter 7 Notes Cash and...

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Chapter 7 Author: Anna Rovira Beavers Needles 2008 8/6/07 1 Financial Accounting Chapter 7 Notes Cash and Receivables I. Management Issues Related to Short-Term Financial Assets Management of short-term assets is critical to providing adequate liquidity. In dealing with short-term liquid assets, management must address three key issues: 1. Managing cash needs during seasonal cycles 2. Setting credit policies 3. Financial receivable. Setting Credit Policies: Companies sell on credit to be competitive and to increase sales. The credit department is responsible for the examination of each person or company that applies for credit. To measure the effect of a company’s credit policies two ratios are used: 1. Receivable Turnover Reflects the ability of the company to collect on their accounts. This ratio consist on one income statement account and one balance sheet account Net Sales Receivable Turnover Average Net Accounts Receivable Example: $2,175,236,000 ($430,825,000 +$390,740,000)/2 This company turns its receivables 5.3 times a year. 365 days Average Days’ Sales Uncollected Receivable Turnover In-class SE-2 The company turns its receivables 5.3 times every 68.9 days. Comparing this result with industry averages will allow you to evaluate the results. Financing Receivables: 5.3 times 68.9 Days Note: Turnover Ratios consist on an Income Statement Account and a Balance Sheet Account
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Chapter 7 Author: Anna Rovira Beavers Needles 2008 8/6/07 2 Receivables tied up the funds of a company. Some companies may decide to sell those receivables to obtain cash. This is done by: 1. Work with financing companies to help their customers finance the purchase of their products. EI. Automobile companies, Ford Motors, Best Buy etc. 2. Factoring: Transferring (selling) their accounts receivable to another entity (called factor). Two methods: Without recourse: All liabilities passes to the company that buys the account. With Recourse
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This note was uploaded on 03/10/2011 for the course BUS 1B taught by Professor Kite during the Spring '11 term at Laney College.

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Chapter 7 - Financial Accounting Chapter 7 Notes Cash and...

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