Imagine That You Are The Treasurer Of Your Organization

Imagine That You Are The Treasurer Of Your Organization And The Comp

Imagine that you are the treasurer of your organization, and the company is in need of cash; unfortunately, the company is unable to secure a loan from the bank. Suggest at least two (2) ways in which the company can obtain the needed cash. Compare and contrast secured borrowing and sale of receivables. Also, recommend one (1) of the methods that the company should use in order to obtain cash. Provide an explanation to support the method that you have selected.

Suppose management is considering offering credit sales to customers but is unsure of what the generally accepted accounting principles are concerning uncollectible accounts receivables. You are the senior accountant, and management has asked for your help. Compare and contrast the percentage of sales method and the percentage of receivables method to recognize uncollectible accounts receivables. Recommendation to management the type of method that would be beneficial to the company if the company is seeking a loan from a bank. Provide a rationale to support your recommendation.

Paper For Above instruction

As the treasurer of an organization facing liquidity challenges, exploring alternative methods to secure cash outside traditional bank loans becomes crucial. Two prominent strategies include secured borrowing and the sale of receivables, each with distinct advantages and disadvantages.

Secured borrowing involves pledging assets such as inventory, property, or receivables as collateral to obtain a loan or credit line. This method typically offers lower interest rates because the collateral reduces the lender's risk. However, it also entails the risk of losing the pledged assets if the company fails to meet repayment obligations. It provides immediate cash infusion but may increase the company's leverage, impacting financial stability in the long term.

Sale of receivables, often executed through factoring, involves selling accounts receivable to a third party at a discount. This approach provides immediate cash without incurring debt, making it attractive for companies seeking quick liquidity. The primary drawback is the cost, as the company receives less than the total value of receivables. Unlike secured borrowing, this method does not create a liability on the balance sheet but involves relinquishing control over the receivables.

In choosing between these options, I recommend the sale of receivables as the preferable method for immediate cash needs. This approach avoids increasing debt levels and does not threaten the company's assets, which can be especially advantageous if the company already has high leverage or limited collateral assets. Additionally, it provides quick liquidity without the long-term commitment associated with secured borrowing, offering financial flexibility during turbulent periods.

Regarding credit sales and uncollectible accounts receivables, the management must decide how to estimate and record bad debts. Two common methods are the percentage of sales method and the percentage of receivables method, each with unique implications for financial reporting and analysis.

The percentage of sales method estimates uncollectible accounts as a percentage of total sales during the period. This approach emphasizes matching bad debt expense with the sales revenue they relate to, aligning with the matching principle. It is straightforward and easy to apply but may not accurately reflect the actual receivables at balance sheet date, especially if receivables collection patterns change.

Conversely, the percentage of receivables method estimates bad debts based on the outstanding accounts receivable at the end of the period. This method involves calculating an allowance for doubtful accounts as a percentage of receivables, providing a more current estimate of uncollectible amounts. It tends to reflect the company's actual financial position more accurately, especially if receivables aging analysis indicates variability in collectibility.

For a company seeking a bank loan, the percentage of receivables method may be more beneficial. Lenders often prefer financial statements that reflect a more accurate picture of assets' realizable value. Using this method improves the credibility of accounts receivable valuation and provides a clearer view of potential bad debts, which can influence lending decisions.

In conclusion, selling receivables is recommended for immediate liquidity over secured borrowing due to its non-leveraging nature and speed. For bad debt estimation, the percentage of receivables method aligns better with prudent financial reporting, especially when seeking external financing, as it offers a more realistic view of asset quality and reduces accounting distortions.

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