You own Widgets ‘R Us and are considering the future direction of your company.

Question

You own Widgets ‘R Us and are considering the future direction of your company. One choice is to fund expansion with outside financing. Your other option is to sell your stores and retire.

1. Considering the two scenarios, discuss the importance of accounts receivable, notes receivable, and investments.
2. What is the significance of current assets vs. long-term assets? Would they affect your ability to obtain a loan or sell your business? Explain.
3. The balance in your Uncollectible Accounts Expense account is quite high. What does this reveal about your business practices? How might this affect your ability to obtain a loan?

Explanation / Answer

1. Considering the two scenarios, discuss the importance of accounts receivable, notes receivable, and investments. The two options available will be based on the Project in hand, which will give the income more than the cost of funds taken on loan. The accounts receivable note receivable and investments are assets to the business. These will be valued by the financial institution before sanction of the loan. The other assets available with the business and securities provided will play an important role to get the required loan at economical rate of interest. However, in case it is not possible to get the loan sanctioned or the business is not that profitable, the owner may choose the second option. 2. What is the significance of current assets vs. long-term assets? Would they affect your ability to obtain a loan or sell your business? Explain. Long term assets are fixed assets, which are owned by the business for its use to run the business. Current assets are the assets, which changes everyday with every transaction. Current assets are for running the business smoothly. Yes these assets will certainly affect the ability to obtain loan as the Fixed assets is a security against the loan and current assets are for interest payments. 2. The balance in your Uncollectible Accounts Expense account is quite high. What does this reveal about your business practices? How might this affect your ability to obtain a loan? This reveals that the company is not able to recover its sale proceeds, and therefore there are too much of bad debts. Further it also reveals that the company has no proper credit check system of its customers. The Accounts receivable will also have a high balances. This can be verified from the receivable turnover ratio. This will certainly affect the ability to obtain a loan, as no financier will sanction a loan to the company, where the proper credit policy is not in place.

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