COM 340 Chapter Notes -Accounts Receivable, Cash Flow, Credit Risk

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oussboss

16 Jan 2023

School

Walsh College of Accountancy and Business Administration

Department

COM

Course

COM 340

Professor

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Many small businesses do a good job delivering their goods and services but then find it difficult to collect payment, often causing a cash flow crunch. This may be because the credit worthiness of a customer was not properly investigated in the beginning or it may be that insufficient attention was paid to monitoring and collecting invoices due. If your business allows for both cash payments and invoices, optimize the amount of cash, as a percentage of total sales, to the highest level possible for your industry or commercial sector: get deposits wherever possible. Larger sales orders, produce-to-order manufacturing and, in particular custom orders, should require a deposit of 10-50% of the final purchase price at order time. This will go a long way to alleviating cash flow shortages and to also assuring the customer"s commitment to the order. Deposits of this nature should be non-refundable: suggest credit cards to secure payment.

Related Questions

1. Beginning inventory plus purchases equals:

a) cost of goods sold

b) goods available for sale

c) net purchases

d) ending inventory

2. Accounts receivable:

a) arise from the purchase of goods or services on credit

b) are amounts owed to a business by its customers.

c) are reported on the income statement.

d) will be collected within the discount period or when due.

3. A perpetual inventory system will always give updated balances for:

a) goods available for sale and sales revenue

b) inventory and cost of goods sold

c) accounts receivable and inventory

d) Inventory and sales revenue

4. What is the primary goal of internal controls for cash payments?

a) To make payments as quickly as possible

b) To ensure that payments are made only for properly authorized transactions

c) To independently verify cash payments

d) To ensure the lowest prices possible are paid

olivecrocodile635

please comment on post

The major advantage of extending credit sales is that it willincrease sales revenue. This is because customers who can't producecash today are still able to buy the good or service of theirchoice.

Extending credit sales is usually a good idea for businesses,but there are a few important factors to consider. First, thebusiness needs sufficient cash flow to account for Cost of GoodsSold (inventory). Customers' payments may delayed, but suppliersstill have to get paid on time. Thus, the business has to be keenlyaware of its cash levels.

This is especially true for businesses that sell large durablegoods at low volumes, like airplane engines. If a customer isunable to pay its debt, this bad debt may have a big affect on cashlevels available for suppliers and investment in otheractivities.

The most important factor to consider when deciding whether tooffer credit sales is the anticipated bad debt expense. This is thepercentage of credit sales that are not ultimately paid. Thebusiness will be forced to eventually write this off against theaccount receivables balance (credit). This may lead to a lowercredit rating. A smaller account receivable balance, which isconsidered liquid, is not good if you wish to borrow against thatbalance (secured borrowing).

Ultimately, a business has to decide whether 1) the increase insales revenue will be greater than the bad debt expense arisingfrom extending credit to customers; and 2) whether the increase insales revenue is sufficient to account for reduced and/or delayedcash flows.

It therefore goes without saying that the credit worthiness ofcustomers should be evaluated before deciding to lend. Backgroundchecks and credit scores should be reviewed. The goal of course tominimize any future bad debt expense.

BluJay Aviation has allowed their clients to pay 30-60 daysafter services have been given. This too often causes their cashflow from operating activities to be negative, even though they areearning a profit. The economy has also made them nervous aboutcollecting since a few businesses that use their services,especially the realtors, may not stay in business. Choose twooptions they might try to improve their cash flow and also advisethem about the valuation of their accounts receivable.

byzantiumcoyote112

COM 340 Chapter Notes -Accounts Receivable, Cash Flow, Credit Risk

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