Question

D.Q. 4.1. Why is selling the receivables, or "factoring "popular with companies such as Macy's and J.C. Penney? What are the advantages of factoring? D.Q. 4.2. Discuss uncollectible accounts. What factors lead to accounts being uncollectible? What options do businesses have when accounts become uncollectible? D.Q. 4.3. What does it mean to write off an uncollectible account? Why would companies do this? What effect does delinquency have on a company's credit rating? D.Q. 4.4. Why is it important for businesses to forecast (predict) their bad debts for an upcoming cycle?

Answer 1

D.Q. 4.1. Why is selling the receivables, or "factoring " popular with companies such as Macy's and J.C. Penney? What are the advantages of factoring?

Answer : According to Warren (2009) selling receivables is called factoring. This is popular with companies such as Macy’s and J. C. Penny’s as they have their own credit cards which has them getting more payables and they then using selling receivables or factoring shifts the collection of the debt. This allows them the cash to continue business which generates growth of the company.

D.Q. 4.2. Discuss uncollectible accounts. What factors lead to accounts being uncollectible? What options do businesses have when accounts become uncollectible?

Answer : Uncollectible accounts are receivables or other debts that have no scope of being materialized at any time soon. Accounts become uncollectible because of many factors like financial instability, bankruptcy or insolvency of the debtor or inability to trace an absconding debtor. When accounts become uncollectible the only option is to write them off as bad debts and remove the amount from accounts receivable. The company can either choose a direct write off method or the allowance method for writing off the bad debts.

D.Q. 4.3. What does it mean to write off an uncollectible account? Why would companies do this? What effect does delinquency have on a company's credit rating?

Answer: What it means to write-off an uncollectible account is the company has made all attempts to contact the debtor and with no results or response from the debtor the account becomes uncollectible. The company has to show what has happened to the uncollectible amount and this is by removing it from the accounts receivable and ends up as a loss on their income statements. They do this to show that they did not collect the money and therefore show a loss and this is reflected on their profit margin. If the company has allot of uncollectible debt they can have it hurt their credit as they are unable to pay their bills.

D.Q. 4.4. Why is it important for businesses to forecast (predict) their bad debts for an upcoming cycle?

Answer: It is important for businesses to forecast or predict their bad debts for an upcoming cycle as it gives them an idea of what they may expect in the next cycle. They can look back and see the uncollectible debts over the different cycles and forecast just what could happen in the next cycle giving them an idea of their profit margin and what they need to continue running the company.