Revenues and Receivables Objective:  Understand receivables and their relationship to value. Why grant credit? Increase in sales—trade-off of the margin on increased sales less expenses on all credit sales. Service to customers. Build relationship with customers—develop new markets.

Revenues and Receivables What are the costs of granting credit? Deferred cash flow—present value, interest –perhaps 10% on balance Bad debts expense—less than 1% to more than 10%. Increase in risks of doing business. Pay income taxes on the receivable. Factoring—sale of receivables with or without recourse 8% - 20%

Estimating Uncollectible Accounts Allowance method required for financial report Aging of ending accounts—conceptually best Percentage of sales—easiest to do. Direct method required for income taxes

Management of Returns and Allowances R & A Costly Most are not customer's fault, but design or delivery of product/service—NON-VALUE Indicates external failure--serious profit loss. Paperwork and return activities. Lost future sales. Reduces profit before tax Opportunities to find out about customers.