What Type Of Receivable Is Evidenced By A Formal Instrument

What Type Of Receivable Is Evidenced By A Formal Instrument And Normal

What type of receivable is evidenced by a formal instrument and normally requires the payment of interest? A note receivable.

When is a receivable recorded by a service organization? When service is provided on account.

At what value are accounts receivable reported on the balance sheet? Cash (net) realizable value.

True or False: Short-term notes receivable are reported at their cash (net) realizable value. True.

Which one of these statements about promissory notes is incorrect? A promissory note is not a negotiable instrument.

Which of the following should be classified as an “other” receivable? Interest receivable.

What type of receivables result from sales transactions? Trade receivables.

Which one of the following is not a method used by companies to accelerate cash receipts? Selling receivables to a factor.

Which of the following accounts is debited when a company factors its accounts receivable? Accounts Receivable.

What is the value at which loans and receivables should be reported under IFRS? Amortized cost.

Paper For Above instruction

Receivables are a critical component of a company's financial statements, representing amounts owed to the business by customers and other parties. Understanding the classifications and recognition criteria for different types of receivables is essential for accurate financial reporting and effective cash flow management. This paper explores the classification of receivables evidenced by formal instruments, such as promissory notes, their recording and valuation, and methods to accelerate cash collections.

Types and Characteristics of Receivables

Receivables can be broadly classified into trade and non-trade receivables. Trade receivables arise directly from sales of goods or services and are typically short-term, expected to be collected within normal operational cycles. Non-trade receivables include items such as interest receivable, taxes receivable, and other miscellaneous receivables that do not generate from primary revenue activities (Kieso et al., 2021).

A notable subset of receivables evidenced by formal instruments is the note receivable. A note receivable is a formal written promise to pay a specific amount of money at a predetermined future date, often with interest (Wild et al., 2020). This distinguishes it from an account receivable, which generally involves a less formal promise to pay, typically arising from credit sales.

Recognition and Valuation of Receivables

A receivable is usually recognized when a service has been provided or goods have been delivered, and the amount is measurable (Kelley, 2019). For example, service organizations record receivables when they provide services on account, aligning recognition with the delivery of service rather than payment receipt. This ensures that revenues and receivables are properly matched in the financial statements.

In terms of valuation, accounts receivable are typically reported at their cash (net) realizable value. This amount accounts for estimated uncollectible accounts, providing a realistic measure of the cash that the company expects to collect (Kieso et al., 2021). For short-term notes receivable, the valuation often involves discounting the future cash flows to present value if applicable, although many are reported at their face value when the interest component is embedded or negligible.

It's important to note that, under IFRS, loans and receivables are reported at amortized cost, which systematically allocates interest income over the life of the asset, reflecting the effective interest rate (IAS 39, 2016).

Methods to Accelerate Cash Collection

Companies employ various strategies to expedite cash inflows from receivables. These include offering discounts for early payment, such as a 2% discount if paid within a specified period, or accepting major credit cards that allow immediate settlement (Brigham & Ehrhardt, 2019). Selling receivables to a factor is another common method, providing immediate cash but typically at a discount. Such factoring involves transferring the right to collect receivables to a third party, often with recourse clauses to handle uncollectible accounts (Gibson & Vaughn, 2022).

When a company factors receivables, the accounts receivable are derecognized, and a liability or expense may be recognized depending on the factor agreement. The accounts are debited for the amount received, net of factoring fees, and any difference may be recognized as a loss or expense (Kieso et al., 2021).

Bad Debts and Allowance Method

Estimating uncollectible accounts is a vital part of receivables management, ensuring receivables are reported at their net realizable value. Using the allowance method, companies estimate bad debts based on historical data, aging analysis, or percentage-of-receivables basis (Garrison et al., 2020). For instance, an aging schedule categorizes receivables by age and applies a corresponding percentage expected to be uncollectible (Kelley, 2019).

Adjusting journal entries are made to reflect estimated bad debts, increasing bad debt expense and recognizing an allowance for doubtful accounts. When specific accounts are identified as uncollectible, they are written off against the allowance account, which does not affect current period income since the expense was recognized earlier (Wild et al., 2020).

Conclusion

In conclusion, the classification, recognition, and valuation of receivables significantly impact a company's financial statements. Formal instruments like promissory notes are distinguished by their written promise to pay, including interest, and are recorded accordingly. Companies employ various methods to accelerate cash collection, including discounts and factoring, which require careful accounting treatment. Accurate estimation of uncollectible accounts through aging analysis and allowance for doubtful accounts ensures that receivables are reported at their realizable value. Understanding these aspects enhances financial statement accuracy and better informs managerial decision-making.

References

• Brigham, E. F., & Ehrhardt, M. C. (2019). Financial Management: Theory & Practice. Cengage Learning.
• Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2020). Managerial Accounting. McGraw-Hill Education.
• Gibson, R., & Vaughn, A. (2022). Accounting Principles. Cengage Learning.
• IAS 39. (2016). Financial Instruments: Recognition and Measurement. International Accounting Standards Board.
• Kelley, R. A. (2019). Financial Accounting: Tools for Business Decision Making. McGraw-Hill Education.
• Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2021). Intermediate Accounting. Wiley.
• Wild, J. J., Subramanyam, K. R., & Halsey, R. F. (2020). Financial Statement Analysis. McGraw-Hill Education.