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Chapter 9: Problem 13

What information can best be elicited from a receivable ratio? A. company performance with current debt collection B. credit extension effect on cash sales C. likelihood of future customer bankruptcy filings D. an increase in future credit sales to current customers

Short Answer

Expert verified
A. company performance with current debt collection

Step by step solution

01

Understand the Question

Determine what a receivable ratio measures. A receivable ratio assesses a company's ability to collect its outstanding credit balances.
02

Analyze Each Option

Evaluate each possible answer in relation to what a receivable ratio reveals.
03

Company Performance with Current Debt Collection

Receivable ratios directly show how effectively a company collects owed debts. This aligns with company performance in current debt collection.
04

Credit Extension Effect on Cash Sales

Receivable ratios do not measure the effect of credit extension on cash sales. This is not the primary focus of the ratio.
05

Likelihood of Future Customer Bankruptcy Filings

Receivable ratios do not directly indicate customer bankruptcy filings. They measure collection efficiency, not customer financial health.
06

Increase in Future Credit Sales to Current Customers

Receivable ratios are focused on historical collections, not predicting future credit sales.
07

Choose the Best Option

Option A best aligns with what a receivable ratio measures.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Company Performance
Receivable ratio analysis plays a crucial role in understanding company performance. This ratio measures how efficiently a company can collect its outstanding debts. It provides insights into how well the company is managing its credit policies and customer payments.

Efficient debt collection increases the cash flow, contributing to overall financial health. Here鈥檚 how:

  • Improved Liquidity: Quick collection of receivables ensures that cash is available for daily operations and investments.
  • Reduced Bad Debts: Effective debt collection minimizes the risk of bad debts, which negatively impact the income statement.
  • Enhanced Profitability: Consistent cash inflows from receivables enhance profitability by reducing the borrowing needs and associated interest costs.
By closely monitoring the receivable ratio, companies can adjust their credit policies to maintain a healthy balance between sales growth and risk management.
Debt Collection
Debt collection efficiency is at the core of receivable ratio analysis. This metric directly indicates how well a company collects payments from its credit customers. The receivable ratio, often calculated as \(\text{Receivable Turnover Ratio} = \frac{\text{Net Credit Sales}}{\text{Average Accounts Receivable}}\), reflects the number of times a company can turn its receivables into cash within a specific period.

High receivable turnover indicates:

  • Effective credit and collections policy
  • Reliable customer base that pays on time
  • Efficient accounting practices

Low receivable turnover, on the other hand, could signal potential issues like:

  • Problems with credit policies or collection efforts
  • High proportion of overdue accounts
  • Poor financial health of customers
Understanding and improving debt collection efficiency is essential to ensuring that a company maintains a strong cash flow and avoids liquidity issues.
Financial Efficiency
Financial efficiency is a broad term that encompasses the effective management of various financial aspects of a business, and receivable ratio analysis is a vital part of this process. The information extracted from this ratio helps companies streamline their financial operations.

Here鈥檚 why financial efficiency matters and how receivable ratio contributes to it:
  • Cost Management: Efficient receivables management reduces the costs associated with collecting debts.

  • Working Capital Optimization: Faster conversion of receivables into cash helps manage working capital more effectively, ensuring that there are enough resources for operational needs.

  • Investment Opportunities: With better cash flow from efficient receivables, companies can invest in growth opportunities like new projects or technology upgrades.
Ensuring that the receivable ratio remains within an optimal range helps balance the need to extend credit to boost sales, while also maintaining financial stability and operational efficiency.

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Most popular questions from this chapter

Which of the following estimation methods considers the amount of time past due when computing bad debt? A. balance sheet method B. direct write-off method C. income statement method D. balance sheet aging of receivables method

Orion Rentals is unable to collect on a note worth \(\$ 25,000\) and has accumulated interest of \(\$ 250 .\) It convert this note and interest to accounts receivable. After some time, Orion is still unable to collect the debt and it decides to sell the converted note to a collection agency. The collection agency will pay only 20\(\%\) of the value of accounts receivable to Orion. What is the amount of cash paid to Orion from the collection agency? A. \(\$ 5,000\) B. \(\$ 5,050\) C. \(\$ 20,000\) D. \(\$ 19,950\)

A company collects an honored note with a maturity date of 24 months from establishment, a 10% interest rate, and an initial loan amount of \(\$ 30,000 .\) Which accounts are used to record collection of the honored note at maturity date? A. Interest Revenue, Interest Expense, Cash B. Interest Receivable, Cash, Notes Receivable C. Interest Revenue, Interest Receivable, Cash, Notes Receivable D. Notes Receivable, Interest Revenue, Cash, Interest Expense

Doer Company reports year-end credit sales in the amount of \(\$ 390,000\) and accounts receivable of \(\$ 85,500 .\) Doer uses the income statement method to report bad debt estimation. The estimation percentage is 3.5\(\% .\) What is the estimated balance uncollectible using the income statement method? A. \(\$ 13,650\) B. \(\$ 2,992.50\) C. \(\$ 136,500\) D. \(\$ 29,925\)

Conner Pride reports year-end credit sales in the amount of \(\$ 567,000\) and accounts receivable of \(\$ 134,000 .\) Conner uses the balance sheet method to report bad debt estimation. The estimation percentage is 4.6\(\% .\) What is the estimated balance uncollectible using the balance sheet method? A. \(\$ 26,082\) B. \(\$ 6,164\) C. \(\$ 260,820\) D. \(\$ 61,640\)
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