Question

Explain how using the financial statements can aid in the evaluation of the company's efficiency related to receivables.

Answer 1

Financial statements can help in evaluating the company's efficiency related to receivables by:-

1. Accounts receivable-to-sales ratio is the ratio which helps in determining the percentage of sales on which amount is due from customers. Financial statements have numbers basis on which we can calculate the ratio.

2. Allowance for bad debt is essential in knowing the amount which the organization thinks that it won't be able to recover. HIgher amount raises doubts about the efficiency of the company in collecting the debts. All information about bad debts can be found in financial statements. Hence, the financial statement is crucial.

3. In the footnotes, details about large customers from which amount is due is provided. If the customers have bad credit history, then it shows that the company does not analyze the customers before selling goods on credit.

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