Find The Accounts Receivable

find Theaccounts Receivabl

This discussion question has two parts. Find the Accounts Receivable (may also be called Trade Receivables) for your selected company. How much is the "net amount"? This is the amount after deducting the Allowance for Uncollectible Accounts (this can have some other names). How much is the "gross amount"? If this information is not shown on the Balance Sheet, you should be able to find it in the notes that follow the financial statements. Do you think the Allowance for Uncollectible Accounts is a reasonable estimate of the uncollectible accounts? Why?

Paper For Above instruction

The assessment of accounts receivable is a critical component of financial analysis, providing insight into a company's liquidity, credit risk management, and overall financial health. This discussion explores the accounts receivable figures for a selected company, the calculation of the net and gross amounts, and an evaluation of the reasonableness of the Allowance for Uncollectible Accounts.

Identifying Accounts Receivable: Gross and Net Amounts

To begin, it is essential to understand what constitutes accounts receivable. Accounts receivable represent the amounts owed to a company by its customers resulting from credit sales. These amounts are periodically reported on the company's balance sheet either directly or indirectly.

The gross amount of accounts receivable reflects the total outstanding balances before any deductions. It indicates the full amount due from customers for goods or services provided on credit. This figure is usually reported explicitly on the balance sheet; however, if not readily available, supplementary notes accompanying the financial statements typically disclose these figures.

The net accounts receivable is derived by subtracting the Allowance for Uncollectible Accounts from the gross receivables. This allowance is a provision made by the company to anticipate the amount likely to be uncollected based on historical data and current economic conditions. Therefore, the net accounts receivable provides a more realistic view of expected cash inflows from credit sales.

Calculating Gross and Net Accounts Receivable

Suppose, for example, a selected company reports on its balance sheet accounts receivable of $500,000, and the Allowance for Uncollectible Accounts is listed as $25,000. Here, the net accounts receivable would be:

Net Accounts Receivable = Gross Accounts Receivable - Allowance

= $500,000 - $25,000 = $475,000.

The gross amount, in this case, would be $500,000. If the gross figure is not directly available on the balance sheet, it can typically be found in the notes accompanying financial statements. These notes often provide detailed breakdowns of receivables, allowances, and aging analyses.

Evaluating the Reasonableness of the Allowance

Assessing whether the Allowance for Uncollectible Accounts is reasonable involves comparing it to historical uncollectible rates, industry standards, and current economic indicators. A reasonable estimate should align with past data, considering the company's collection patterns, credit policies, and economic conditions that impact customer solvency.

For instance, if historically, 5% of accounts receivable becomes uncollectible, and the gross receivables are $500,000, an allowance of $25,000 (which is 5%) would be consistent and reasonable. Conversely, if recent economic downturns have increased customer defaults, a higher allowance might be warranted.

Furthermore, reviewing the company's aging schedule, which categorizes receivables based on how long they are outstanding, can help assess whether the allowance reflects realistic expectations. For example, receivables overdue beyond 90 days might have a higher likelihood of being uncollectible, and the allowance should accordingly be adjusted to reflect this.

Conclusion

In summary, understanding the gross and net accounts receivable — and the allowance for uncollectible accounts — provides valuable insight into a company's liquidity and risk management. A reasonable allowance is essential to ensure that the company's financial reports accurately represent expected cash inflows and financial health. Regular review and adjustment based on historical data and economic conditions are crucial for maintaining this reasonableness.

References

  • Bloomenthal, A. (2020). Accounts receivable: Definition, characteristics, and management. Investopedia. https://www.investopedia.com/terms/a/accountsreceivable.asp
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