9.0 Why It Matters

 

Marie owns Skateboards Unlimited, a skateboard lifestyle shop offering a variety of skate-specific clothing, equipment, and accessories. Marie prides herself on her ability to accommodate customer needs. One way she accomplishes this goal is by extending to the customer a line of credit, which would create an account receivable for Skateboards Unlimited. Even though she has yet to collect cash from her credit customers, she recognizes the revenue as earned when the sale occurs. This is important, as it allows her to match her sales correctly with sales-associated expenses in the proper period, based on the matching principle and revenue recognition guidelines.

By offering credit terms, Skateboards Unlimited operates in good faith that customers will pay their accounts in full. Sometimes this does not occur, and the bad debt from the receivable has to be written off. Marie typically estimates this write-off amount, to show potential investors and lenders a consistent financial position. When writing off bad debt, Marie is guided by specific accounting principles that dictate the estimation and bad debt processes. Skateboards Unlimited will need to carefully manage its receivables and bad debt to reach budget projections and grow the business. This chapter explains and demonstrates demonstrate the two major methods of estimating and recording bad debt expenses that Skateboards Unlimited can apply under generally accepted accounting principles (GAAP).

Agriculture Cash Flow Requirements

Most agriculture operations in the US are still family owned and operated and cash management is crucial to stay solvent in a very challenging business. Diversified farming operations will have crops that are harvested several times a year while others harvested only once a year, especially if they are permeant crops. The month to month need for inputs and the cost of those requires the use of reserve cash and typically bank operating loans. Keeping receivables current from those crops that have monthly income such as alfalfa, can help ease the need for cash for the other crops.