Comprehensive Report: Intermediate Accounting II, Receivables Analysis

This report delves into the analysis of receivables within the framework of Intermediate Accounting II. It begins with an introduction to efficiency ratios, specifically the receivables turnover ratio and the days' sales outstanding ratio, which are crucial for assessing a company's effectiveness in collecting cash from customers. The report provides a detailed explanation of these ratios, including how they are calculated and interpreted, using examples to illustrate their practical application. Furthermore, the report examines the practice of selling receivables at a discount, exploring the various reasons why a company might choose this strategy, such as the need for fast cash, freeing up working capital, and retaining ownership. The conclusion summarizes the key findings, emphasizing the importance of these ratios and the strategic implications of discounting receivables. The report provides a comprehensive overview of these key concepts in financial accounting.

Running head: INTERMEDIATE ACCOUNTING II
Intermediate accounting II
Name of the student
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1INTERMEDIATE ACCOUNTING II
Table of Contents
Introduction................................................................................................................................2
Receivables turnover ratio and day’s sales outstanding ratio....................................................2
Selling receivables at discount...................................................................................................3
Conclusion..................................................................................................................................3
Reference....................................................................................................................................5

2INTERMEDIATE ACCOUNTING II
Introduction
Efficiency ratios those are also known as the activity ratios are analysed by the
companies for measuring the time it takes on average for collecting the cash from the the
potential customers. For measuring the time required for cash collection average receivables
ratio and day’s sales outstanding ratio is computed (Agha, 2014).
Receivables turnover ratio and day’s sales outstanding ratio
Receivable turnover ratio is the accounting measure used for measuring the
company’s effectiveness in collecting the dues from its debtors. It is calculated through
dividing the amount of credit sales of the entity by average amount of receivables where
average receivables is calculated by adding the opening balance of accounts receivable with
closing balance and dividing it by 2 (Prasad, 2016).
Example – If the credit sales for ABC Ltd is $ 82,40,000 for 2018 and for 2017 is 93,52,000
and account receivable for the year 2016 is $ 86000, 2017 is $ 72,000 and for the year ended
2018 is $ 102,000, the receivable turnover ratio for the year 2017 and 2018 will be calculated
as follows –
Receivable turnover ratio = Net credit sales / Average receivables
From the above example, and calculation it can be identified that the ABC Ltd
collects its receivable 94.71 times on average and 118.38 times on average for collecting its

3INTERMEDIATE ACCOUNTING II
receivables. On the other hand, it can be identified that for the year 2018 the sales are
outstanding for 3.85 days whereas for 2017 it was 3.08 days. Hence, it can be stated from the
above ratios that the company’s efficiency has been deteriorated in 2018 as compared to 2017
with regard to collectability.
Selling receivables at discount
There are various reasons for which a company may sell its receivable at discounts.
The reasons are as follows –
 Fast cash – an entity may be in need of fast cash for various reasons and purchasing of
raw material or meeting its short term obligations. As cash generally comes from the
customer who takes some time to make the payment, it will be tough for the entity to
meet its expenses if the customer delays in paying. Selling the receivables to factors
in discount will enable it to receive the cash in lesser time (Erdoğan, 2017).
 Free up the working capital – generally large amount of capital is tied up in
inventories. Hence, funds from accounts receivable free up the working capital
quickly so that the amount can be used for business growth. Further, the instant cash
can be used for generating growth through hiring any other sales person who can
bring more business.
 Retain ownership – it is the last thing that the owner will prefer to give up any part of
business. Often the small businesses and the start-ups are required to rely on outsider
investors for running the business and growing. Hence, receivables can be sold at
discount for immediate cash requirement (Leonard, 2015).

4INTERMEDIATE ACCOUNTING II
Conclusion
From the above calculation it can be stated that the various ratios like receivable
turnover ratio and days sales outstanding can be used for measuring the efficiency in
collecting cash from customers. On the other hand, received can be sold on discount in
requirement of fast cash.

5INTERMEDIATE ACCOUNTING II
Reference
Agha, H. (2014). Impact of working capital management on Profitability. European Scientific
Journal, ESJ, 10(1).
Erdoğan, E. O. (2017). Factoring Application as an Alternative to Financing and Effects of
Various Macroeconomic Indicators. International Research Journal of Applied
Finance, 8(4), 178-185.
Leonard, J. (2015). Introduction to receivable securitization. The Secure Lender, 2015(June),
17-19.
Prasad, S. (2016). The Efficacy of Credit Insurance: A Study of the Quantitative Impact on
Trade Receivables and Receivables Turnover Ratio.