CLASSIFICATION OF RECEIVABLES
Many companies sell on credit in order to sell more services or products. The receiv-
ables that result from such sales are normally classified as accounts receivable or notes
receivable. The term receivablesincludes all money claims against other entities, in-
cluding people, business firms, and other organizations. These receivables are usually
a significant portion of the total current assets. For example, an annual report of
La-Z-Boy Chair Companyreported that receivables made up over 40% of La-Z-Boy’s
current assets.Accounts Receivable
The most common transaction creating a receivable is selling merchandise or services
on credit. The receivable is recorded as a debit to the accounts receivable account. Such
accounts receivableare normally expected to be collected within a relatively short pe-
riod, such as 30 or 60 days. They are classified on the balance sheet as a current asset.Notes Receivable
Notes receivableare amounts that customers owe for which a formal, written instru-
ment of credit has been issued. As long as notes receivable are expected to be collected
within a year, they are normally classified on the balance sheet as a current asset.
Notes are often used for credit periods of more than 60 days. For example, a fur-
niture dealer may require a down payment at the time of sale and accept a note or a
series of notes for the remainder. Such arrangements usually provide for monthly pay-
ments. For example, if you have purchased furniture on credit, you probably signed a
note. From your viewpoint, the note is a note payable. From the creditor’s viewpoint,
the note is a note receivable.
Notes may be used to settle a customer’s account receivable. Notes and accounts
receivable that result from sales transactions are sometimes called trade receivables.
Unless stated otherwise, we will assume that all notes and accounts receivable in this
chapter are from sales transactions.356 Chapter 8 Receivables
Describe the common
classifications of
receivables.1
Coffee Anyone?
HOW BUSINESSES MAKE MONEY
Starbucks’strategic goal is to establish the Starbucks name
as the most recognized and respected brand in the world. To
achieve this goal, the company focuses on two core
areas of business: retail coffee stores and nonretail
sales. When planning new retail stores, Starbucks
focuses on high-traffic, high-visibility locations that
offer convenient access for pedestrians and drivers.
Starbucks varies the size and format of its stores to
fit the location. As a result, you may find Starbucks
in a variety of locations, including downtown and
suburban retail centers, office buildings, and uni-
versity campuses. The company’s specialty opera-
tions further develop the Starbucks brand through alternative
supply channels and new products. For example, the companyhas recently expanded coffee sales to grocery stores, ware-
house clubs, and restaurants. Other activities include joint ven-
tures with companies, such as PepsiCo, Inc.and
Dreyer’s Grand Ice Cream, to market food prod-
ucts such as Frappucino and Dreyer’s Ice Cream un-
der the Starbucks name. Finally, Starbucks has
recently extended its brand-building activities to non-
food items by offering a Starbucks credit card in
conjunction with Banc Oneand music through the
Starbucks Hear Music channel on XMSR.Source:Starbucks Corporation Form 10-K filing with the
Securities and Exchange Commission for the year ending October 3,
2004.