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HFT 2401. Chapter 9 Receivables and Payables. Receivables. Accounts Receivable Very Liquid Current Assets – Turn to cash in 30 to 60 days Trade Receivables – From the “ordinary” course of business – usually unsecured Guest Ledger City Ledger Creditor – the holder of the receivable

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hft 2401

HFT 2401

Chapter 9

Receivables and Payables

receivables
Receivables
  • Accounts Receivable
    • Very Liquid Current Assets – Turn to cash in 30 to 60 days
    • Trade Receivables – From the “ordinary” course of business – usually unsecured
    • Guest Ledger
    • City Ledger
    • Creditor – the holder of the receivable
    • Debtor – the one who owes the money
collection
Collection
  • The sale is not “complete” until the cash is in the bank
  • Uncollectible accounts – bad debt losses
  • Credit checking procedures
  • Collections
    • Courtesy letters
    • Phone calls
    • Collection agency / attorney
uncollectible accounts
Uncollectible Accounts
  • Direct Write Off Method
    • Write off at the time it is deemed uncollectible
  • Allowance Method
    • Accrues a percentage based on history
    • Preferred as it is more applicable to the matching principle
    • Carrying value – net on the books
    • Percentage of sales method – credit versus cash sales
receivables aging
Receivables Aging
  • Usually done in 30 day increments
  • Used on a historical basis to determine allowance entry
  • Also used for cash forecasting purposes
  • Used by credit managers to determine continued credit worthiness of account
notes receivable
Notes Receivable
  • Written promises to receive cash in the future
  • Usually interest bearing
  • Can be secured by an asset
  • Maker – the one promising to pay
  • Payee – the one who is owed
  • Interest = Principal x Rate x Time
notes receivable7
Notes Receivable
  • Accounts receivable can be converted
  • Dishonored notes – written off the books
  • Discounting – Sell the value of the note to a third party for collection
    • Also called factoring
    • Increase cash flow
    • Discount = Maturity Value x Discount x Discount Period
payables
Payables
  • Accounts Payable – Unsecured debt resulting from the ordinary course of business
    • Invoices
    • Usually due in 30 days or less
    • Cash discounts can be offered
  • Notes Payable – Secured debt
    • Non-interest bearing
    • Interest bearing
      • Interest = Principal x rate x time
homework
Homework
  • Problem 7
  • Problem 8
  • Problem 13