year. The three largest accounts making up the current assets are usually in
cash, receivables, and inventories. Cash is the sum of the cash on hand and
the deposits in the bank. Accounts receivable are amounts due the firm from
customers who have bought on credit. They are often segregated into ac-
counts receivable and notes receivable. An account receivable is the usual way
credit is given in American business practice. It simply means that the buyer
of the goods is charged for the purchases on the books of the seller. If a note
receivable is used, the purchaser of the goods has signed a promissory note in
favor of the seller. A note, except in certain lines of business where they are
customary, is generally required only of customers with weaker credit ratings
or those who are already overdue on their accounts.
An account called reserve for bad debts or allowance for doubtful ac-
counts is generally subtracted from the receivables account, a so-called
contra-asset. This is called a valuation reserve; it is an attempt to estimate
the amount of receivables that may turn out to be uncollectible. The receiv-
ables account minus this reserve, the net receivables, is counted as an asset
on the balance sheet. Loans to officers or employees or advances to sub-
sidiaries are generally included in the other assets. Also, except for finan-
cial firms—banks and finance companies—items such as accrued interest
receivable are usually not included with the other receivables.
Inventories are items making up the finished stock in trade of the busi-
ness, as well as the raw materials that a manufacturing firm will use in its
production process to create finished products. In an industrial firm the in-
ventory consists basically of finished goods—that is, items that the company
does not have to process further. In manufacturing companies the inventory
divides into three categories: raw materials, goods-in-process, and finished
goods. If we consider the current assets from the “flow of funds” aspect,
that is, how close they are to being turned into cash, then cash will be listed
first. Receivables—sales made but not yet collected—are the nearest asset to
cash, and inventory follows receivables. Finished goods are more current or
liquid than goods-in-process, and goods-in-process more so than raw mate-
rials, for a going concern. The relative composition of the inventory can be-
come a matter of importance, and is sometimes unfortunately overlooked in
analyzing the current credit position of a manufacturing firm.
A problem in presenting inventory values on the balance sheet is to
keep separate the amount properly ascribed to supplies. Supplies are not
part of the normal stock in trade, nor are they processed directly into fin-
ished goods. In general, an item that is an integral part of the final product
is part of the raw material inventory, whereas items used in corollary func-
tions are supplies. Supplies are usually placed with the miscellaneous cur-
rent assets; like prepaid expenses, they represent expenditures made
currently that save outlays in the future.
backadmin
(backadmin)
#1