Finance Management (Discussion questions)
First student
Accounts receivable (AR)
Accounts receivable (AR) refers to the means by which companies record sales and send statements and bills to their customers. In simple terms, AR keeps track of the customers’ unpaid bills and the company’s revenues. When sales are recorded, invoices are sent to customers. Apart from the total debt owed by customers, invoices contain information about discounts offered by the company to customers as incentives to pay invoices in a timely manner (Baker & Powell, 2010). When the invoice is posted, the revenue is documented as income. In most cases, when the invoice is posted, the system increases or credits the balance within a revenue account. Since the client has not yet paid the invoice, the invoice amount also increases or debits an asset account referred to as accounts receivables. Most common forms of receivable accounts include customer accounts receivable, employee loans receivable and notes receivable.
The importance of managing AR
The fundamental importance of is to maximize company value through attaining a tradeoff between the liquidity, profitability, and risk. Minimizing the risks of bad debts or maximizing sales are not covered in accounts receivable management (Berger, 2008). When firms seek to maximize sales as an objective, they will have to sell on credit. On the other hand, a company would not sell to anyone on credit if the aim were to minimize the risk of bad debt. In fact, companies must manage their accounts receivables in such a manner that sales are increased to a level whereby risks remain at an acceptable limit. Therefore, for firms to achieve the objective of maximizing their value, they ought to manage accounts receivable.
What affects the ability to control AR and strategies to address issues?
Bad debts are highly expected to affect the ability to control AR. The latter is manifested when customers either never pay their bills or delay paying their bills. The best approach to address this issue is for businesses to investigate all . This must be done with a definite goal of identifying and accounting for bad debts. Sometimes, it might be challenging to determine whether customers will never pay or whether they will delay paying their bills. In this regard, a firm should make assumptions because all records must reflect the firm’s current financial position with the highest level of accuracy (Schaeffer, 2012). The Generally Accepted Accounting Principles (GAAP) provides accounting methodologies for bad debts and doubtful accounts: the allowance method and the write-off method.
Second student
Accounts receivable (AR)
Accounts receivable (AR) is the amount due to be paid by debtors or customers because of goods sold on credit. Receivables are marked by three characteristics namely economic value, futurity, and risk, which explain the need and basis for efficient management of accounts receivables.
The importance of managing AR
Effective and efficient management of accounts receivables is helpful in expanding sales. It is a useful tool for marketing. It does help in retaining old customers and winning new customers. Well managed accounts receivable means profitable credit accounts. Managing accounts receivable promotes profit realization and sales until a company reaches a point where the investment return funding receivables is less than cost used in financing additional credit (Berger, 2008).
What affects the ability to control AR and strategies to address issues?
The ability to control AR is affected when some customers are able to repay the accounts after the accounts have been written off. Firms can address this issue by reinstating the amount into customers’ accounts if a firm takes this approach, it must conduct a journal entry to expand accounts receivables and minimize the expense of bad debts. Consequently, this would trigger a reduction in expenses and net income overstatement for the current period. Unless the subsequent reinstatement and the write off occur concurrently, the GAAS matching principle will have been violated (Baker & Powell, 2010).
Third student
Accounts receivable (AR)
When clients buy services or products, often, they do so based on payment terms. This means that they receive the service or product but pay for them later. Usually, this is done on credit terms determined by the company and referred to as accounts receivables. It represents the total amount the clients owe due to a firm exchanging goods in exchange for the promise to pay later. This differs from the debt where a company lends money to another party in return for interest (Brigham & Ehrhardt, 2011).
The importance of managing AR
Managing accounts receivables involves costs. For a firm to maximize its value, it ought to control these costs. Thus, it includes managing opportunity costs, administration expenses and accounts receivables. The importance of managing AR is to control and regulate these costs without eliminating them. Where no credit is granted, costs could be minimized to zero (Salek, 2006).
What affects the ability to control AR and strategies to address issues?
In case a company has many customers with too much money on bills, the overdue restricts working capital and cash flow. This affects the ability to control accounts receivable because it limits the ability of the firm to meet its obligations like loans and accounts payable. Fortunately, a strategy of using computer software helps gather process and organize data in different ways. Therefore, a firm can produce many reports to be used in management insight of financial affairs in various ways that raw data cannot help (Brigham & Ehrhardt, 2011).
Part B
Accounts receivables show the significant percentage of a firm’s assets. Because it often represents a notable ratio of a firm’s assets, it can be tempted to manipulate its value. Therefore, ethical behavior is critical in maintaining the integrity of a firm’s financial statements (Baker & Powell, 2010). This draws companies to adhere to the GAAP rules. Evidently, a firm’s accounts receivable asset could be both complex and simple. Its simplicity is shown by the fact that is illuminated on the balance sheet in one control account as one debit figure. Therefore, the asset has one net value demonstrating the balance due to be collected from clients.
References
Berger, S. (2008). Fundamentals of health care financial management: A practical guide to fiscal issues and activities. San Francisco: Jossey-Bass.
Baker, H.K., & Powell, G.E. (2010). Understanding Financial Management: A Practical Guide. Oxford: Blackwell Pub.
Brigham, E.F., & Ehrhardt, M.C. (2011). Financial management: Theory and practice. Mason, OH: .
Salek, J.G. (2006). Accounts Receivable Management Best Practices. Hoboken: John Wiley & Sons.
Schaeffer, M.S. (2012). Essentials of Credit, Collections, and Accounts Receivable. New York: John Wiley & Sons.
