Finance Management (Discussion Questions) First Student Accounts Essay

Finance Management (Discussion questions)

First student

Accounts receivable (AR)

Accounts receivable (AR) refers to the means by which companies record sales and send statements and bills to their customers. In simple terms, AR keeps track of the customers' unpaid bills and the company's revenues. When sales are recorded, invoices are sent to customers. Apart from the total debt owed by customers, invoices contain information about discounts offered by the company to customers as incentives to pay invoices in a timely manner (Baker & Powell, 2010). When the invoice is posted, the revenue is documented as income. In most cases, when the invoice is posted, the system increases or credits the balance within a revenue account. Since the client has not yet paid the invoice, the invoice amount also increases or debits an asset account referred to as accounts receivables. Most common forms of receivable accounts include customer accounts receivable, employee loans receivable and notes receivable.

The importance of managing AR

The fundamental importance of managing accounts receivable is to maximize company value through attaining a tradeoff between the liquidity, profitability, and risk. Minimizing the risks of bad debts or maximizing sales are not covered in accounts receivable management (Berger, 2008). When firms seek to maximize sales as an objective, they will have to sell on credit. On the other hand, a company would not sell to anyone on credit if the aim were to minimize the risk of bad debt. In fact, companies must manage their accounts receivables in such a manner that sales are increased to a level whereby risks remain at an acceptable limit. Therefore, for firms to achieve the objective of maximizing their value, they ought to manage accounts receivable.What affects the ability to control AR and strategies to address issues?

Bad debts are highly expected to affect the ability to control AR. The latter is manifested when customers either never pay their bills or delay paying their bills. The best approach to address this issue is for businesses to investigate all outstanding accounts receivable. This must be done with a definite goal of identifying and accounting for bad debts. Sometimes, it might be challenging to determine whether customers will never pay or whether they will delay paying their bills. In this regard, a firm should make assumptions because all records must reflect the firm's current financial position with the highest level of accuracy (Schaeffer, 2012). The Generally Accepted Accounting Principles (GAAP) provides accounting methodologies for bad debts and doubtful accounts: the allowance method and the write-off method.

Second student

Accounts receivable (AR)

Accounts receivable (AR) is the amount due to be paid by debtors or customers because of goods sold on credit. Receivables are marked by three characteristics namely economic value, futurity, and risk, which explain the need and basis for efficient management of accounts receivables.

The importance of managing AR

Effective and efficient management of accounts receivables is helpful in expanding sales. It is a useful tool for marketing. It does help in retaining old customers and winning new customers. Well managed accounts receivable means profitable credit accounts. Managing accounts receivable promotes profit realization and sales until a company reaches a point where the investment return funding receivables is less than cost used in financing additional credit (Berger, 2008).….....