More of this Feature • Lesson 3 Main • How to Get Copies • What is it? • Typical Balance Sheet • Current Assets • Receivables • Receivable Turns • Inventory • Inventory Turns • Inventory Example • Prepaid Expenses • Current Liabilities • Working Capital • WC Per Dollar of Sales • Negative Work. Cap • Current Ratio • Quick Ratio • Long Term Investment • Property, Plant, Equip. • Intangible Assets • Goodwill • Deferred Charges • Debt, Debt to Equity • Other Liabilities • Minority Interest • Shareholder Equity • Book Value • Com. & Pref. Shares • Cap. Surplus, Reserve • Treasury Stock • Retained Earnings • Formula & Calculations • Putting it all Together • Segment 2

Related Resources • Investing Lesson 1 • Investing Lesson 2 • Investing Lesson 3 • More Lessons

Receivables

Also sometimes known as "Account Receivables", this is money that is owed to a company by its customers.

Here's how it works: Let's say Wal-Mart wants to order a new DVD which is being released by Warner Brothers.  Wal-Mart orders 500,000 copies for its stores.  Warner Brothers receives the order, and within a week, ships the DVDs to one of Wal-Mart's warehouses.  Included in the shipment is a bill (let's say WB charged Wal-Mart $5 per DVD for half a million copies - that's $2.5 million).  Warner Brothers has already sent the movies to Wal-Mart, even though Wal-Mart hasn't paid a penny.  In essence, Wal-Mart is buying on credit and promising to pay WB's the $2.5 million. 

The $2.5 million would go on Warner Brother's balance sheet as receivables.

Generally a company that sells a product on credit sets a term.  The term is the number of days customers must pay their bill before they are charged a late fee or turned over to a collection agency (most terms are, 30, 60 or 90 days).  If Warner Brothers sold the DVDs to Wal-Mart on a 30 day term, Wal-Mart must pay its bill during that time.

While accounts receivable are good, they can bring serious problems to a business if they aren't handled properly.  What if Wal-Mart went bankrupt or simply didn't pay Warner Brothers?  WB would then be forced to write down its receivables on the balance sheet by $2.5 million.  This is what is called a delinquent account.  Normally, companies build up something called a reserve to prepare for situations such as this.  Reserves are set amounts of money that are taken out of the profits each year and put into an account specifically designed to act as a buffer against possible loses the company may incur.  (Reserves are touched on in Part 29).  When customers don't pay their bills, companies can take money out of the reserve they had built up to pay back suppliers.

Next page > Our First Balance Sheet Calculation: Receivable Turns  >  1, 2, 3, 4, 5, 6, 7,  more >>