ACCOUNTS

RECEIVABLE
MANAGEMENT
OBJECTIVE
• To ensure that the firm’s investment in accounts
receivable is appropriate and contributes to
shareholder wealth maximization
CUSTOMER CREDIT
Customer credit – financing provided by the seller to
the customer in the course of sale of goods or services
• Terms of payment:
1.Credit cards
2.Installment credit
3.Export-import trade credit
BENEFITS OF CREDIT
• Increased sales
• Avoidance of lost sales
KEY FACTORS AFFECTING ACCOUNTS
RECEIVABLE
• Sales
• Credit policy
• Collection efficiency
FACTORS THAT DETERMINE THE LEVEL
OF ACCOUNTS RECEIVABLE
1. Determining the required investment in receivables.
Megatalk Company opened for business on
the first day of the month. It had cash and
capital of P800,000 and rented a store
location. It offered importers a credit period
of 15 days. Sales per day amounted to
P40,000. Cost of goods was 80% of sales.
The company purchased to merchandise
daily and paid its suppliers on the same day.
FACTORS THAT DETERMINE THE LEVEL
OF ACCOUNTS RECEIVABLE
1. Determining the required investment in receivables.
Megatalk Company opened for business on the first day of the
month. It had cash and capital of P800,000 and rented a store
location. It offered importers a credit period of 15 days. Sales per
day amounted to P40,000. Cost of goods was 80% of sales. The
company purchased to merchandise daily and paid its suppliers
on the same day.

Accounts Receivable = Daily sales x credit period

= 40,000 x 15 days
= 600,000
FACTORS THAT DETERMINE THE LEVEL
OF ACCOUNTS RECEIVABLE
2. Importance of efficient collection in reducing
investment in accounts receivable.
 If a customer in Day 1 does not pay, the accounts
receivable in Day 16 will increase. If this continues,
cash would be depleted and company would not be
able to support future sales.
FACTORS THAT DETERMINE THE LEVEL
OF ACCOUNTS RECEIVABLE
3. Effect of change in sales
 The level of accounts receivable changes the same
direction as changes in sales
 Higher sales will increase accounts receivables and
shall require financing
FACTORS THAT DETERMINE THE LEVEL
OF ACCOUNTS RECEIVABLE
4. Effect of a change in credit period
 A change in credit period would affect the level of
accounts receivable.
 A company may lengthen its credit period to
encourage sales
 It Accounts
may shorten its credit=period
Receivable to conserve
Sales per cash
day x new credit
period
= 40,000 x 10 days
= 400,000
FACTORS THAT DETERMINE THE LEVEL
OF ACCOUNTS RECEIVABLE
5. Combined effect of simultaneous changes in credit
terms and sales
 A company might change its credit term in order to
influence sales
 A liberal credit period can increase sales. Tightening
Accounts Receivable = New sales per day x New
the credit period is likely
credittoperiod
constrain sales.
= 45,000 x 20 days
= 900,000
TECHNIQUES IN ANALYZING Longer credit
terms decreases
ACCOUNTS RECEIVABLE turnover.
More collection
efforts
• Measuring the Efficiency of Accounts Receivable increase
Management
turnover.
a. Turnover ratios measure the efficiency of management of
accounts receivable.
- Accounts receivable turnover is closely related to average
collection period .
- A higher credit standard reduces the level of sales and
receivables and decreases turnover.
- Cash discounts reduce the level of accounts receivable and
increases turnover.
TECHNIQUES IN ANALYZING
ACCOUNTS RECEIVABLE
b. Average age of accounts receivable
- Average rate of all accounts
- High cost of administering past due
- Make aging schedule of accounts receivable
- Exert more collection efforts to slow-paying customers
TECHNIQUES IN ANALYZING
ACCOUNTS RECEIVABLE
c. Significance of past due accounts
- The degree of bad debts is the ration of estimated bad debts
to total accounts receivable
- Management controls the degree of bad debts through credit
standards, credit terms and collection policies.
- Strict credit standards, shorter credit periods, and rigorous
collection procedures are associated with low levels of bad
debt.