©2012 McGraw-Hill Ryerson Limited 1 of 39 ©2012 McGraw-Hill Ryerson Limited 3.Define the various marketable securities available for investment by the firm and calculate the yield on these instruments. (LO3) 4.Characterize accounts receivable as an investment resulting from the firm’s credit policies, outline the considerations in granting credit, and evaluate a credit decision that changes credit terms to stimulate sales. (LO4) Learning Objectives

©2012 McGraw-Hill Ryerson Limited 2 of 39 ©2012 McGraw-Hill Ryerson Limited Management of Accounts Receivable Trade credit facilitates sales. Trade credit is an effective financing source for smaller firms as they lack access to capital markets or bank financing. Accounts receivable should be deemed as an investment. The return on this current asset should be compared with the direct cost of borrowing or the opportunity cost of investing in other assets. LO4

©2012 McGraw-Hill Ryerson Limited 3 of 39 ©2012 McGraw-Hill Ryerson Limited Credit Policy Administration 3 things to consider in deciding whether to extend credit: Credit Standards determine credit rating of customers 4 C’s of credit credit agencies, bureaus Terms of Trade e.g. 2% / 10days / net 30 days Collection Policy Average Collection Period Ratio of Bad Debts to Credit Sales Aging of Accounts Receivable LO4

©2012 McGraw-Hill Ryerson Limited 4 of 39 Figure 7-4 Financing growth in accounts receivable Forgo 8% return Build-up 10% return Forgo 12% return 7.5% cost 7% cost LO4

©2012 McGraw-Hill Ryerson Limited 5 of 39 ©2012 McGraw-Hill Ryerson Limited Customer Credit Profile - The 4 C’s CHARACTER - willingness to pay –Supplier, legal, union problems? –Willing to provide information? CAPACITY - ability to pay –Past & future profits? –Good management? CAPITAL - net worth –Growing assets? Low debt? CONDITIONS - state of industry, economy –Impact on customer –How customer adapts to changing conditions LO4

©2012 McGraw-Hill Ryerson Limited 6 of 39 ©2012 McGraw-Hill Ryerson Limited An Actual Credit Decision LO4