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...
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