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Receivables - Components of Financial Statements, Financial Analysis and Reporting | Financial Analysis and Reporting - B Com PDF Download

Definition: Accounts Receivable (AR) is the proceeds or payment which the company will receive from its customers who have purchased its goods & services on credit. Usually the credit period is short ranging from few days to months or in some cases maybe a year. 

Description: The word receivable refers to the payment not being realised. This means that the company must have extended a credit line to its customers. Usually, the company sells its goods and services both in cash as well as on credit. 

When a company extends credit to the customer, the sale is realised when the invoice is generated, but the company extends a time period to the customers to pay the amount after some time. The time period could vary from 30-days to a few months. 

Account Receivables (AR) are treated as current assets on the balance sheet. Let's understand AR with the help of an example. Suppose you are a manufacturer M/S XYZ Pvt Ltd and you manufacture tyres. 

A customer gives you an order of Rs 1,00,000 for 100 tyres. Now, when the invoice is generated for that amount, sale is recorded, but to make the payment the company extends the credit period of 30-days to the customer. 

Till that time the amount of Rs 1,00,000 becomes your account receivable because the customer will pay that amount before the period expires. If not, the company can charge a late fee or hand over the account to a collections department. 

Once the payment is made, the cash segment in the balance sheet will increase by Rs 1,00,000, and the account receivable will be decreased by the same amount, because the customer has made the payment. 

The amount of account receivable depends on the line of credit which the customer enjoys from the company. Usually, this is offered to customers who are frequent buyers.

The document Receivables - Components of Financial Statements, Financial Analysis and Reporting | Financial Analysis and Reporting - B Com is a part of the B Com Course Financial Analysis and Reporting.
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FAQs on Receivables - Components of Financial Statements, Financial Analysis and Reporting - Financial Analysis and Reporting - B Com

1. What are the components of the financial statements related to receivables?
Ans. The components of the financial statements related to receivables include the balance sheet, income statement, and cash flow statement. In the balance sheet, receivables are listed under current assets. The income statement may include information on bad debt expenses or provisions for doubtful accounts related to receivables. The cash flow statement will show the inflow of cash from the collection of receivables.
2. How can financial analysis help in evaluating receivables?
Ans. Financial analysis can help in evaluating receivables by providing insights into the liquidity and creditworthiness of the customers. By analyzing the aging of receivables, the company can identify any potential collection issues or credit risks. Financial ratios such as the accounts receivable turnover ratio or the days sales outstanding ratio can also be used to assess the efficiency of the company's receivables management.
3. What is the importance of reporting receivables in financial statements?
Ans. Reporting receivables in financial statements is important as it provides information about the amount of money owed to the company by its customers. It helps in assessing the company's liquidity position, as receivables represent potential cash inflows. It also aids in evaluating the creditworthiness of the customers and assessing the effectiveness of the company's credit policies and collection efforts.
4. How are receivables measured and recognized in the financial statements?
Ans. Receivables are typically measured and recognized at their net realizable value in the financial statements. Net realizable value is the estimated amount the company expects to collect from its customers after considering any potential bad debts or allowances for doubtful accounts. Receivables are recognized when there is a legally enforceable right to receive payment and it is probable that the economic benefits will flow to the company.
5. What are some common challenges in managing and reporting receivables?
Ans. Some common challenges in managing and reporting receivables include timely collection of payments, identifying and managing credit risks, assessing the adequacy of allowances for doubtful accounts, and dealing with customers who may default on their payments. It is also important to accurately estimate the collectability of receivables and ensure proper documentation and disclosure in the financial statements.
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