Question

• Describe the different types of receivables.
• Compare and contrast the direct write-off method and the allowance method for uncollectible accounts.
• Why doesn’t the cash realizable decrease when an uncollectible account is written off under the allowance method?
• Describe the principles of sound accounts receivable management.
• Describe methods to accelerate the receipt of cash from receivables.
• Compare the advantages of a note receivable with those of an account receivable.
• Explain the statement presentation of receivables.
• What is net realizable value in respect to receivables? And why are receivables reported at net realizable value?

Answer 1

1. When uncollectables written off in written off method, it is treated as Expenses and reduced uncollectable amount. Hence, cash realisation from collectables decreases. In allowance method an amount towards doubtful debts set aside in reserve account. Hence it will not effect the cash realizable amount.

2.Sound principles of account receivale management

a. credit wothiness of an idividual or business entity

b. credit period to be extended keeping view the working capital requirement of the company

c. close follow up of collections

d. To improve cash collections by giving discounts

3. Methods to accelerate receipts of cash from receivables

a. By selling receivable - factoring and assignment ie., transfers receivable to another in exchange for cash

b. By offering discounts so as to improve cash collections from receivables

4. Note receivables and Account receivable

a.The advantage of Note receivables- it earns interest .Accounts receivables do not earn interest

b. Note receivables are legal contracts ie., financial loans and accounts receivables arises out of trade or services provided by the company to its customers

c. Notes receivables, normally, more than one year and account receivable are short term -one accounting year

5. Presentation of receivables

Receivables are showns as current asset in Balancesheet as realisable after making necessary adjustments of bad debts or allowance for bad debts

6. Net realizable value indicates -total receivable value minus bad debts or baddebt allowance.

Why Accouns receivables are reported net realizable value in financial statement because the amount of cash

that company expectes to realize from the customers