Question

What is The Importance Of Analyzing Accounts Receivable.

Accounts Receivable Financing : An alternative to bank financing for your small business

DISCUSS THE ABOVE STATEMENT BY TAKING EXAMPLE OF BUSINESS ORGANIZATION OF YOUR CHOICE.

answer in 2 pages

Answer 1

Account receivable measures the money that customers owe to a bussiness for goods or services already provided.Because the business wants the money in future so the it becomes the part of asset on the bussiness's balance sheet.

The following point indicate the importance of account receivable-

1.Credit policy variable- Firm credit policy are credit standards,credit period,cash discount,and collection effort. Thess variable decide the level of Sales,bad debts, discount taken by customer,and collection expense.So it is necessary to analysis of account receivables.

2.Credit standards- Account receivables analysis helps deciding whether setting liberal credit standards to push sales up or tend to depress sales,reduce the bad debts loss, decrease the investment in receivable and lower the cost of collection.

3.credit period- It refers to the length of time customers are allowed to pay for their purchases. Lenghthing of credit period pushes sales up by attracting more customer which needs larger investment in receivables and heigher bad debts losses.While shortening of the credit period would have opposite effects.

4.Credit evaluation- Before granting credit to the prospective csutomer firm should see the credit worthiness of customer.By analysing receivable the firm's experience and by taking numerical credit scoring of customer,firm finds credit worthiness of customer.

5.credit granting decision- By analysis of account receivable the decision of granting credit should be taken.

Example-

Rehan Bikes shops is retail store that sells bikes.Due to declining cash sales,john decides to extend credit sales to all customers.In the fiscal year ended December 31,2019 there were $100,000 gross credit sales, and return of $10,000. Starting and ending account receivable for the year $10,000 and $15000. resp.

Now we use the formula-

Receivable Turnover Ration=$100,000-$10,000/($10,000 +$15,000)/2

= 7.2

which shows that Rehan bikes shop collected its average receivable approximately 7.2 times over the fiscal year ended 31, december 2019

Receivable turnovsr in days =365/7.2=50.69

It shows average customer takes approximately 51 days to pay their debt to the store.