Accounts Receivable: Management and Analysis (Portfolio 5111)

This Portfolio explains and analyzes Generally Accepted Accounting Principles (GAAP) relating to the valuation and presentation of accounts receivable (AR), and offers insights on best-practices for the internal reporting of AR.

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This Portfolio is part of the Accounting Policy and Practice Series, an essential resource including more than 70 accounting Portfolios and the latest news and developments.


This Portfolio explains and analyzes Generally Accepted Accounting Principles (GAAP) relating to the valuation and presentation of accounts receivable (AR), and offers insights on best-practices for the internal reporting of AR. The work also addresses the use of AR-related accounting information and provides practical examples of how this information may be used in statement analysis, credit decisions, forecasting, and similar activities. The Portfolio draws on a combination of authoritative literature on external reporting and research from practitioner and academic sources.
This Portfolio supplements and complements BNA Tax and Accounting Portfolio 5110-2nd, Howe and Mitschow, Accounts Receivable: Financial Accounting and Auditing (Accounting Policy and Practice Series). That Portfolio primarily addresses external reporting issues; the present Portfolio primarily concerns itself with the use of AR information for analysis and management purposes. The present Portfolio explores aspects of forecasting and valuation that go beyond the use of simple percentages and weighted averages to statistical techniques, which include regression analysis and Markov chains. Each of these approaches can be readily implemented through Excel.
Industry-specific factors influence the calculation and reporting of AR. The Portfolio thus discusses in detail practices that arise in numerous industries, including health services, construction contracting, agriculture, oil and gas, airlines, software and bundled products, franchising, hospitality, regulated utilities, retail, newspapers, casinos, insurance companies, real estate brokers, apparel, and food distributors.
This Portfolio may be cited as BNA Tax and Accounting Portfolio 5111-2nd, Howe and Mitschow, Accounts Receivable: Management and Analysis (Accounting Policy and Practice Series).


Harry Howe, Ph.D.

Harry Howe, B.A., Brown University; MBA (Accounting), Graduate Management Institute, Union College; Ph.D., Union College. Associate Professor and Coordinator of Accounting Program, State University of New York (SUNY), College at Geneseo. Member, New York State Society of CPAs; Rochester chapter of the IMA; Rochester chapter of the FEI; and American Accounting Association. Published work has appeared in The Review of Business Information Systems; The CPA Journal; Journal of Business Valuation and Economic Loss Analysis; Decision Sciences Journal of Innovative Education; Strategy and Games; Strategic Finance; International Quarterly Journal of Marketing; The International Journal of Management; and the Journal of Accounting, Taxation and Finance for Business. Prior to completing doctoral studies and joining the accounting faculty at Geneseo, Dr. Howe managed a NYC-based construction company and practiced as a commercial real estate broker in the Hudson Valley.

Mark C. Mitschow, Ph.D.

Mark C. Mitschow, Ph.D. (Accounting), University of Maryland at College Park. Associate Professor of Accounting, State University of New York (SUNY), College at Geneseo, teaching primarily financial accounting courses. His research interests include business ethics, the financial services industry, and the accounting profession. Dr. Mitschow has authored 15 peer-reviewed articles (in journals including Research on Professional Responsibility and Ethics in Accounting, The CPA Journal, and the Journal of Business Ethics) and 24 conference presentations.

Table of Contents

Detailed Analysis

I. Scope, Purpose, and Contents of Portfolio

Introductory Material

A. Essentials of Accounts Receivable

B. Scope of This Portfolio

1. Internal Reporting

a. Recognition of AR

b. Valuation

c. AR General Ledger and Subsidiary Ledger Balances

d. Forecasting and Analytic Procedures

2. Managing a Portfolio of AR

C. Related Topics Treated in Other BNA Portfolios

II. Sales and Credit Practices Affecting the AR Balance

Introductory Material

A. Sales Returns and Allowances

1. AR Valuation in Connection With Revenue Recognition

a. Example Where Revenue Recognition Criteria Met

b. Example Where Revenue Recognition Criteria Not Met

2. Immaterial Amounts

B. Discounts for Prompt Payment

C. Trade Discounts

III. Bad Debt Expense and the Allowance for Doubtful Accounts

Introductory Material

A. Payment Pattern

B. Management Science

1. Markov Chains

a. Background

b. Example

2. Lagged Regression

3. Neural Networks

IV. Accounting for Accounts Receivable by Industry

Introductory Material

A. Uncertainties to Consider

B. Industries Addressed

C. Construction-Type Contracting Companies

1. Nature of Industry

2. Recognition of AR

a. Accounting for AR Arising From Change Orders

(1) Priced and Unpriced Change Orders

(2) Accounting for Change Orders Under the Completed Contract Method

(3) Accounting for Change Orders Under the Percentage-of-Completion Method

b. Accounting for AR Arising From Claims

(1) Formal Definition of Claims

(2) Recognition of AR Arising From Claims

(3) Completed Contract Method - Required Disclosures

(4) Contingent Asset

c. Liens

d. Uncertainty, AR Valuation, and Suitable Controls

e. Accounting for AR Under Cost-Plus-Type Contracts

3. Measurement

a. General Procedure for Billing Construction Receivables Under the Percentage of Completion Method

b. Retainage

c. Interest on Long-Term Receivables

d. Allowance for Doubtful Accounts

4. Presentation

a. Offsetting or Netting Amounts

(1) Offsetting - Basic Rule

(2) Offsetting - Advances

b. Analysis of Work in Process

c. Payments Due to Subcontractors

d. Current and Noncurrent Classification

e. Account Titles

f. Joint Venture Accounting for AR

g. Segmentation

5. Sample Disclosure

6. Accounting for AR - Internal Perspective

7. Users of Contractor Accounting Information

D. Agricultural Producers

1. Sales to Marketing Cooperatives

a. Readily Determinable Prices

b. Prices Not Readily Determinable

c. Retainage

2. Disclosure Detail for AR Composition

E. Healthcare

1. Recognition

a. Recognition at Provider's Full Established Rates

b. Nonrecognition for Charity Care

2. Measurement

a. Third-Party Payors

(1) Process

(2) Risks

b. Rates

(1) Cost

(2) Cost Plus a Percentage

(3) Unit Based Approaches

(4) Charges Minus a Discount

(5) Charity

(6) Role of Negotiation in Rate Setting

c. Cost Shifting

(1) Example 1

(2) Example 2

(3) Emergent Issues

3. Presentation

a. Presentation in Balance Sheet

b. Charity Care

c. Concentrations of Credit Risk

d. Pledge Receivables

4. Other Healthcare Receivables

a. Stop-Loss Insurance Receivables

b. Pledge Receivables

c. Interfund Receivables

F. Other Industries

1. Oil and Gas

a. Related Party Issues Disclosure

b. AR Valuation in an Oil and Gas Joint Venture Context

(1) Journal Entry for Working Interest if the Purchaser Assumes the Responsibility of Distributing Taxes and Royalty Income

(2) Journal Entry for Royalty Interest

(3) Journal Entry for Working Interest When WI Assumes the Responsibility of Distributing Taxes and Royalty Income

2. Airlines

a. AR - Ticket Sales

b. AR - Interline Activities

c. Refunds

d. Reporting

3. Software and Bundled Products

4. Franchising

a. Licensing Fees

b. Cooperative Advertising

c. Sale of Products

5. Hospitality

a. City Ledger Accounts

b. House Accounts

6. Regulated Utilities

a. Customer Accounts Receivable

b. Customer Deposits

c. Other Accounts Receivable

d. Accumulated Provision for Uncollectible Accounts-Credit

e. Accounts Receivable From Associated Companies

7. Retail

8. Newspaper Publishing

a. Individual Subscribers

b. News Dealers

c. Advertising

9. Casinos

a. Gaming Customer AR

(1) Description

(2) Accounting Procedures

b. Foreign Chips

c. Bad Debts-Check Cashing

10. Insurance Companies

a. Property and Liability

b. Life Insurance

(1) Billings and SAP

(2) Deferred Premiums Not a Receivable

c. Reinsurance

11. Real Estate Brokers

12. Apparel Manufacturing and Importing

13. Food Distribution

a. Vendor Receivables

b. NSF Checks Receivable

G. Other Industry Practices

1. Credit Card Receivables Generally

a. Description of Bankcard Operations

b. Accounting for Bankcard Receivables

(1) Classification

(2) Measurement

c. Private Label Cards

d. Accounting for Private Label Card-SOP 01-6

(1) Interest Income Receivable

(2) Nonaccrual and Aged Balances

e. Accounting for Private Label Card - Statement of Cash Flows

2. Barter

3. Third-party Services When Contract Language Has Evergreen Provisions

V. Analysis of Accounts Receivable

Introductory Material

A. Days Sales Outstanding (DSO) and Related Measures

1. Calculation

2. Interpretation

3. Cash Gap

4. Related Measures

B. Alternatives to DSO Analysis

1. Payment Pattern Analysis

2. Use of Payment Pattern Analysis in Forecasting

3. Weighted DSO

4. Collection Days Index

5. Collection Effectiveness Index

C. Variance Analysis Methods

1. Decomposition of Changes in the AR Balance

2. Variance Analysis in a Flexible Budget Setting

D. Traditional Financial Statement Analysis

1. Goals of Financial Statement Analysis

2. Metrics

a. Proportionate Changes in Sales and AR

b. Trends in Collection Periods

c. Correlation of Earnings and Cash Flow From Operations

d. Proportionate Changes in AFDA and AR

3. Case Study: AFDA at HealthSouth

E. AR Analytical Calculations and Benchmarking

F. Statistical Decomposition Analysis

1. Elements of SDA

a. The Nature of Information

b. Proportions as Probabilities

c. The Information Measurement

(1) Additivity and the Basic Information Measurement

(2) Extension to Financial Statement Decomposition Measure

(3) Analytical Properties of the Decomposition Measure

2. Application Example

3. Other AR-related Applications of SDA

a. Balance Sheet

(1) Decomposition of Current Assets

(2) Decomposition of Working Capital

(3) Decomposition of Total Assets

b. Statement of Cash Flows

G. The AR Concentration Ratio

1. Calculation

2. Interpretation

3. Use of CR in Credit Policy Decisions

VI. Computer Applications and Management Approaches to Accounts Receivable

Introductory Material

A. Credit Scoring

1. Evaluation of Credit Scoring Models

2. Using Credit Scoring Models

3. Design Approaches to Credit Scoring Models

a. Behavior Based Scoring

b. Rules Based Scoring

c. Neural Network Modeling

d. Data Mining

(1) Understanding the Business

(2) Understanding the Data

(3) Data Preparation

(4) Modeling

(5) Evaluation

4. Developments in Commercial Credit Scoring

a. Sarbanes-Oxley

b. Trends: New Products and Declining Prices

c. Leveraging Credit Information in the Collections Function as an Adoption Inducement

5. Impediments to Wider Use of Credit Scoring Software

B. Recording AR

C. E-Billing

1. Electronic Bill Presentment and Payment (EBPP)

2. Automated Clearing House and Electronic Funds Transfer

3. Reconciliation

a. Efficiency and Cash Flow

b. Sarbanes-Oxley Compliance Issues

c. Future Trends

D. Auto Posting

E. Collections Software

1. Definition and Functionality

2. Leveraging AR Data

a. Risk-Based Collections

b. Leveraging Other Information

c. Devolution of Credit and Collections

3. Software Selection

VII. Trends in Managing AR

A. Introduction

B. Current Practices for Managing an AR Portfolio

1. Collections Outsourcing

a. AR Collections Outsourcing

(1) Regulatory Issues

(2) Public Relations

(3) Infrastructure

(4) Retention and Wages

(5) Overseas Vendors

(6) Special Customers

b. Collections in the Healthcare Industry

2. Other BPR Best Practices Impacting AR

C. Charging Interest

1. Collection Agencies

D. Privacy

1. Credit Card Information

2. Healthcare Industry AR

Working Papers

Working Papers


Worksheet 1 Glossary of Abbreviations and Acronyms Used in Portfolio

Worksheet 2 AIA Document G702-1992

Worksheet 3 AIA Document G703-1992

Worksheet 4 Billing Example Under G702-G703

Worksheet 5 AIA-Change Order Process

Worksheet 6 AIA-Claims Process

Worksheet 7 Cost Loaded Schedule

Worksheet 8 Table 3.01

Worksheet 9 Figure 3.02: Forward Transitions Figure 3.03: Backwards Transitions

Worksheet 10 Table 3.06: Data for Lagged Regression Example

Worksheet 11 Table 3.07: Regression Output

Worksheet 12 Figure 4.01: Overview of Accounting for AR in Construction-Type Contracts

Worksheet 13 Excerpts From Legal Commentary and Litigation on Claims and Change Orders

Worksheet 14 Table 4.02: FAR 31.205 (Modified)

Worksheet 15 Excerpt From Form 10K, Caterpillar Incorporated Year Ended December 31, 2006

Worksheet 16 Table 4.03

Worksheet 17 Excerpt From Form 10K, Foster Wheeler Ltd. Year Ended December 29, 2006

Worksheet 18 Overview: Accounting for Agricultural Commodities Transferred From Producer

Worksheet 19 Disclosure of Inventories, Sales, and Receivables - ConAgra Foods, Inc. 2007 10-K

Worksheet 20 Overview: Accounting for Healthcare AR

Worksheet 21 Table 4.05: Cost Shifting, Example 1

Worksheet 22 Table 4.06: Cost Shifting, Example 2

Worksheet 23 Figure 4.06: EITF Issue 00-21

Worksheet 24 Excerpts From Form 10K, Polo Ralph Lauren Corp. Year Ended March 31, 2007

Worksheet 25 Table 5.01: Aging Table With Sales Data and DSO Calculations

Worksheet 26 Table 5.04

Worksheet 27 Table 5.05

Worksheet 28 Table 5.06: Aging Fractions and Balance Fractions

Worksheet 29 Figure 5.05: Sales Pattern, Collection Experience, and Joint Effects

Worksheet 30 Table 5.09

Worksheet 31 Table 5.10: Data for Galanger & Ifflander Example

Worksheet 32 Table 5.11: Variance Analysis of AR Balance

Worksheet 33 Table 5.13: GenCo-Cash Flow From Operations

Worksheet 34 Figure 5.08: Cash Flow Correlations at HealthSouth

Worksheet 35 Table 5.09: HealthSouth Bad Debt Activity

Worksheet 36 Table 5.13: Net Income for HealthSouth

Worksheet 37 Sample CRF Report

Worksheet 38 Basic Information Measurement for SDA

Worksheet 39 Table 5.14: Statistical Decomposition Analysis-Data

Worksheet 40 Table 5.15: Decomposition Calculations

Worksheet 41 Table 5.16

Worksheet 42 Table 5.18: Multi-Year Decomposition of Working Capital

Worksheet 42 Table 5.20

Worksheet 44 Cradle-to-Grave Perspective on AR

Worksheet 45 Risk Table

Worksheet 46 Figure 6.01: Using Credit Scoring Models

Worksheet 47 Figure 6.02: Integrating CSM and Traditional Approaches

Worksheet 48 Figure 6.03: Logistic Probability Function

Worksheet 49 Figure 6.04: Decision Tree Modeling of Credit Risk (Consumer)

Worksheet 50 Figure 6.05: Decision Tree Modeling of Credit Risk (Commercial)

Worksheet 51 Figure 6.06: Data Mining Process

Worksheet 52 Figure 6.07: EBIDS Process Flow

Worksheet 53 Figure 6.08: Collection Strategy and Treatments for Small Retailers

Worksheet 54 Figure 6.09

Worksheet 55 Table 7.01: Online Resources for HIPAA Information

Worksheet 56 Examples of Disclosures Concerning Accounts Receivable by Selected Public Companies



Court Cases:

American Institute of Certified Public Accountants:

AICPA Statement on Auditing Standards:

AICPA Statements of Position:

AICPA Guides:

Financial Accounting Standards Board:

FASB Concepts Statements:

FASB Statements:

FASB Research Reports:

Emerging Issues Task Force:

Accounting Principles Board:


Articles, Books, and Miscellaneous

BNA Tax and Accounting Portfolios:

Referenced Web Sites: