FINA 470 Chapter Notes - Chapter 4: Gross Profit, Inventory Turnover, Weighted Arithmetic Mean
23 Feb 2017
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4-3: the two most important questions facing the financial analyst with respect to receivables are: (1) is the receivable genuine, due, and enforceable?, and (2) Most provisions for uncollectible accounts are based on past experience although they should also make allowances for current and emerging industry conditions. In practice, the accountant is likely to attach more importance to the former than to the latter. The analyst must, in such cases, use one"s own judgment and knowledge of industry conditions to assess the adequacy of the provision for uncollectible accounts. Information that would be helpful in assessing the general level of collection risks with receivables is not usually found in published financial statements. Such information can, of course, be sought from the company directly. For example, the operating cycle concept allows the inclusion of installment receivables, which may not be fully collectible for years.
