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Analysis of Accounts Receivable Analysis of accounts receivable involves two issues the relative size of accounts receivable and the adequacy of the allowance for uncollected accounts Murray Neumann Elgers 2000 p 220 Size-The size of accounts receivable is usually assessed relative to the amount of credit sales This seems appropriate because credit sales give rise to accounts receivable accounts receivable earns no return after the discount period has expired Most firms do not separately disclose credit sales so net sales are usually used This is figured using the following ratio accounts receivable as a percentage of sales accounts receivable gross sales Adequacy of allowance for uncollectible accounts an overall estimation of the accounts receivable amounts that will not be collected These are presented as a contra-asset account that is subtracted from the accounts receivable This is figured using the following ratio Allowance for uncollectible accounts Accounts receivable gross The implication this has for managers is that management should attempt to maximize the return on accounts receivable Managers must also decide which customers will be granted credit Managers need to set a minimum credit rating for its customers so that profitability is maximized Inventory-Inventory consists of products that are acquired for resale to customers For many companies inventory is a major asset and a significant source of revenue Cash flow-Cash flow is the amount of cash a company generates and uses during a period calculated by adding non-cash charges to the net income after taxes Cash flow can be used as an indicator of a companys financial strength In essence cash flow measures real money flowing into or out of a companys bank account Equade Internet ltd 2000 Cost flow assumptions-Most businesses purchase inventory items on an ongoing basis Usually these purchases are not made at a uniform price This in some cases causes an accounting problem when the inventory is sold
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