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CHAPTER 1 1. Introduction 1.1.

Background of the study There are different kinds of current assets found in almost all business such as cash, securities accounts receivable and inventories. The amount of investment in each type of current asset may vary from day-to-day. If the amount of cash on hand exceeds immediate cash requirements, the excess cash might be invested in securities until needed. These securities are accounted for as temporary investments. (Fess, 1984)Therefore the average amount invested is frequently used in deciding how large the investment should be, decisions regarding investment in one type of current asset are frequently not independent of decisions regarding other current assets. For example a change in credit policies that affect account receivable may also affect sales and therefore affect the desirable level of inventory. The result is that there are very large number of alternative levels of investment in each type of current asset.

Accounts receivable is one of the current assets and it represents the extension of credit given by the firm to its customers. The extension of credit to customers by most businesses is a cost of doing business. By keeping its money fed up in accounts receivable the firm losses for incurring these costs. While the availability of credit facilitates many business transactions, it is also costly. The firm can be competitive, attract and retain customers and improve and sales and profits. Merchants frequently note that the availability of credit entices customers to make a purchase decision. (Walther,2008)


For most companies account receivable is very important investment with the concern for return on assets expressed by many companies in recent years. As it constitutes large amount of asset value. Some researches show as a percentage of total assets, accounts receivable has been estimated
to constitute 20% for large organizations and 30% in small/medium sized organizations. Up to 80% of business transactions between corporations are conducted on credit. (Leitch, 2009) There has

come ever-increasing focus on the funds committed to receivables. Whether this current asset is managed efficiently influence very strongly the amount of fund invested. The optimal investment is determined by comparing benefits to be derived from a particular level of investment with the costs of that level.

Generally, the firms’ accounts receivable is directly controlled through involvements in the establishment and management of credit policy which includes determining credit selection credit standards, and credit terms and collection policy the firm's approach to managing each of this aspect of account receivable is heavily influenced by competitive conditions. Among the major controllable determinants of demand the firm’s credit policy is a tool for managing and monitoring accounts receivable. (FM,27-2)

The length of time granted by the seller to the buyer before which the account is settled differs from time to time and industry to industry. Within a firm different credit periods may be allowed to customers depending on their credit worthiness and other factors such as trade discount allowed. If the account is not settled at the specific period it will be turned into uncollectible account.


A firm grants trade credit to protect its sales and to attract the potential customers to buy its services at favorable terms but it involves an element of risk which should be carefully analyzed. as the 20% of the total customers are credit service customers from whom 80% is almost earned. It is anessential marketing tool acting as a bridge for the movement of services to customers. 2008) To minimize the uncollectible accounts and the consequent additional cost burdens the organization should have monitor its accounts receivable in appropriate ways and policies. Statement of the Problem The term receivable includes all money claims against people organization or other debtors. Receivables are acquired by a business enterprise in various kinds of transactions. Management of receivables is the main determinant factor for the existence and efficient performance of every business organization The main revenue of Ethio Telecom is resulted from credit bill of services.(Gianetti.2. Because differentiated products and services tend to have more quality variation. making buyers more reluctant to pay before having had time to inspect the merchandise or ascertained the quality of services.(Tele Negarit. 1. The telecom operator has credit policy which comprise credit selection credit standards.The Ethio telecom is the sole telecom operator and provides its service on credit basis to corporate customers. and credit terms and collection policies. 3|Page .2009) This is likely to be significant asset for the firms but it has its own cost to the firm such as cost of managing receivables & bad debt losses etc.

and its relationship with principles and theories in the management of account receivable. Objective of the study 1.4.     Assess the implementation of the accounts receivable procedures and policies.3.2 Specific Objectives The specific objectives of the study are stated as follows  Assess various accounts receivable management procedures in the organization. 4|Page . The other stakeholder is government as the organization state owned sole operator company. Assess efforts made to protect uncollectible accounts. This shows that the case will definitely touch many stakeholders. assess and evaluate accounts receivable management in Ethio Telecom northern region.3. 1. Assess selected customer eligibility with the selection procedures to have credit from the company. Evaluate the status of uncollectible accounts. As the customers are corporate customers they will be in need of this project to see the performance of their service provider in order to strengthen their relationship. 1.2 General Objective The general objective of the study is to diagnose.3. The main focus of this project is to understand whether the northern region Ethio telecom follows proper receivable management system or not and to help the organization feed with factual details for possible remedial action. Significance of the study This project focuses in the management of accounts receivable in the case of Ethio telecom northern region.1.

These secondary data enable to see the theories and the pattern of practice in managing accounts receivable.5.(research advisors. 5|Page .This project enables the government to evaluate the performance of the company and may initiate the need to assess the other regions or the company as a whole.2 Sampling techniques and design Here descriptive research method will be used as a research design from a given population. Margin of Error = 5%).5. The company credit policy and the primary data will depict the available practice in the company.com) Based on this information the proportion who would be repeat customers within plus or minus 5% margin error. the business companies are 418 and the rest 121 are non government organizations. this paper would be important to serve as a base for further study on similar problems. 1. Similarly.5. Many researchers (and research texts) suggest that the first column within the table should suffice (Confidence Level = 95%. The government offices 2714. 1. The total population size is 3253. books and journals. This will enable the researcher have a sample size of 346 representing almost 1 to10.These total population comprises government offices. This will be collected from previous research reports. There are different type of customers namely government offices. business companies and non government organizations.1 Data sources and type Combination of primary and secondary data will be used. non government offices and business companies in which their proportion is stated below. The secondary data will help in assessing & comparing relevant theories & practices of managing accounts receivable. Methodology 1. The company’s credit policies as well as the periodical reports are the main sources.

4 Method of analysis The researcher is going to apply the descriptive research approach.3 Data collection method The company’s credit policy as well as the account receivable reports is the main sources in order to see the practice.Convenience simple random sampling will be used because of its simplicity and accessibility to the customer. These figures are expected to show the efforts made to collect accounts receivable early and based on the data to be collected from customers it will be revealed the practice of managing accounts receivable and its status comparing with the policy of the company . But in order to have the views of the customers it is important to have primary data by distributing questionnaires. 1.2011) 1.5. The data processing is to be conducted manually and in house editing will be applied. As the customers are obliged to come to their local collection office of Ethio telecom the questionnaires will be distributed conveniently as it is described in the above section. Besides it is economical in terms of money time. additionally the data collected from the questionnaires will be tabulated and converted into percentages. theories in managing accounts receivable and other related practices. (Ahmed.5. 6|Page .

The application of these theories and their relationship with balance of accounts receivable in the case of Ethiotelecom is to be analyzed. write-off account receivable.7.  The researcher is expecting none response error. The researcher will see why companies trade on credit. And it will focus the investigation on the problems pertaining to bill preparation problem and bad debt problems in collecting the amounts. Scope of the study The study will have theories about management of accounts receivables. 1. Some of the respondents may not respond to the available primary data because of time constraint because some of the customers are business persons.1. Besides managers and staff who are not happy with the current condition may refuse to respond. and the collection policy such as types of aging of accounts receivables the valuation accounts receivable. The data analyzed and interpreted will not have the capacity to represent another region as it may have different situation in other regions. 7|Page . Limitation of the study  Because of financial and time constraints this study will not cover all region of Ethio telecom. These projects will be conducted in Ethio telecom northern region.6.  Since the organization is in transformation period the organizations documentation of previous data may not be easily found. Time is also another constraint which will not allow minimizing some statistical errors. the significance of credit policies.

(Keiso. investigating ways of speeding up collections and reducing bad debts. It includes determining discount policy and credit policy for marginal customers.1.2010) Account receivable means money which is billed to a company by a customer for products and services provided on credit. (Leitch. and setting terms of sale to assure ultimate collection. In any way since the account receivable is a liquid asset it may become uncollectible account if mishandled by the respected body. This is treated as an existing asset on a balance sheet.8 Conceptual framework Accounts receivable management directly impacts the profitability of the firm. And Some policies and application can create distorted accounting information that will hamper collecting the liquid asset account receivable. A detailed sale is normally only treated as an account receivable after the customer is sent an invoice.2009) 8|Page .

Literature Review 2.1 Definition of Receivables Receivables are aliens of various types and by an entity for the future receipt of cash. Trade credit is generated when goods or services are exchanged for a loan which is subsequently exchanged for cash. 1991) 2. receivables are claims for the receipt of cash.(Hoyle. Receivables from Client most of the time represent a substantial part of a business enterprise’s liquid resources and should appear as a separate items in the current assets section of the balance sheet at their net realizable value.2 Trade Account Receivables Trade account receivable causes in the course of sales of good or services to customers.2009) 2. however the manager can vary the level of receivable in keeping with the trade off between profitability and risk lowering credit standards may stimulate demands which item should lead to larger profitability. Such as sales of goods or services.(Leitch. goods or services.3 Credit Policy The firms credit policies are the chief influences on the level of a firms account receivable . Trade credit is generated through credit sales and managed through accounts receivable.CHAPTER TWO 2. Most commonly.27-2)But there is cost to carrying the 9|Page . loans made amount due from leasing of assets etc.as with the other current assets. which cause from normal trade or other type of transactions an event.(FM.

credit standards. selling goods or services to customers.com) This shows the company may sell mostly on cash bases. Setting a maximum on the amount of credit offered to a customer limits the exposure of the firm to the risk that the customer will not pay. (Walther.2. (James. The policy includes the quality of the trade accounts accepted.1 Credit Decision Business firms extend credit various groups of customers to individual government units. the firm’s financial manager directly controls accounts receivable through involvement in the establishment and management of credit policy includes determining credit selection. Generally.2008) In deciding to provide credit to customer. but the firm may not be able to expand sales and the profit that should be 10 | P a g e .3. the credit manager must evaluate the chance of nonpayment and estimate the benefits of extending credit the benefits results from the additional sales obtained and any interest or fees charged for the credit. customer credit business. and less cost of credit administration.(FM. The length of credit period the cash discount (if any) for early payment.3.27-2) 2.(freedictionary. 1998) 2. and may extend credit only to the most reliable and financially strengthen customer such standards will result in no bad-debt losses. and credit terms.additional receivable as well as a greater risk of bad –debt losses. An event decisions are based primarily on the creditor's assessment of the customer's likelihood of payment. Credit standards According to the free accounting dictionary credit standard is the guideline a company follows to determine whether a credit applicant is creditworthy.

Understanding the key variables that must be considered when the firm is contemplating relaxing or tightening its credit standards will give a general idea of the kinds of decisions involved.A.1986) The firm's credit standards are the minimum requirements for extending credit to a customer.(Gentry. but the firm will have to carry large receivable. Generally increases in sales affect profits positively whereas decreases in sales affect profits negatively. This cost is attributable to the forgone earning opportunities resulting from the necessity to tie-up founds in account receivable. (James.(Gentry. Carrying or maintaining accounts receivable involves a cost to the firm. sales are expected to decrease. 1998) The major variables that should be considered when evaluating proposed changes in credit standards are. sales volume Changing credit standards can be expected to change the volume of sales. If credits standards are relaxed sales are expected to increase and if credit standards are tightened. investment in accounts receivable. Therefore the higher the firm's investment in accounts receivable the greater the 11 | P a g e .gained on lost sales may be more than the cost saved by the firm on the other hand . if credit standards are lower. Thus the choice of optimum credit standards involves a trade off between incremental return and incremental costs (Gallinger. the firm may have larger sales.1985) B.1985) The cost of administering credit and bad debt losses will also increase.

A collection policy is needed because all customers do not pay the firms bills in time some customers are slow payers while some are non-payers the collection effort should therefore aim at accelerating collections ensure prompt and regular collection. If the firm relaxes its credit standards the volume of accounts receivable increase and so does the firms carrying cost (investment).carrying cost and vice .4. Prompt collection is needed for fast turnover of working capital keeping collection costs and bad debts with in limits and maintains collection efficiency. (Leitch. The increase in bad debts associated with relaxation of credit standards raises bad debt expenses ad affects profits negatively. Regularly in collection keeps debtors alert and they tend to pay their dues promptly.1986) C. Collection policy and procedures A common goal of accounts receivable management is to ensure debts are collected within specified credit terms . Proportion of bad-debt losses and the shorter the average collection period all other things being the same.The firm determines it's over all collection policy by the combination of collection procedures it under takes.(Gallinger. Bad debt expenses The probability or risk of acquiring a bad debt increases as credit standards are relaxed.2008) 2.2008) These procedures include things such as letters phone calls personal visit and legal action.(Leitch.versa.(Hoyle.1991) 12 | P a g e .

1984) Through collection procedures should be firmly established individual cases should be dealt with on their merits. This may be due to necessary conditions or other factors beyond the control of the customers such cases need special consideration. (FM.paying customers. If it is responsible for collection it should consult the sales department before initiating an action against non. The average collection period It is the average amount of time needed to collect account receivable.1984) Average collection period = accounts receivable Average sales per day The average collection period is meaningful only in relation to the firm’s credit terms. The coordination between accounts and sales department is necessarily and must be ensured formally.1. The slow paying customers are needed to be handled very factually.4.The collection policy should lay down clear-cut collection procedure. Dividing the average daily sales in to the accounts receivable balance arrives as it. The responsibility for collection & follow -up should explicitly fix.27-4) The accounting department maintains the credit records and information. Some customer may be temporarily in tight financial position and in spite of their best intentions may not be able to pay on due date. It may be entrusted to the accounts or sales department or to a separate credit department. The collection procedures for past dues or delinquent accounts should also be established in unambiguous terms. 2.(Fess. If for instance a firm extends 30 day credit terms to customers an average collection period which is 13 | P a g e .(Fess.

Of course the lengthened collection period could be the result of an international relaxation of credit term enforcement by the firm in response to competitive pressures and if the firm's average collection period is less than the days of the credit term it would be quite acceptable.(Keiso. 2. It is assumed that increased collection efficiency would reduce the percentage of debt in the older category. Aging requires that the firm's accounts receivable be broken down in to groups based on the time of origin. If debts are collected on time. Aging Accounts Receivable Aging is a technique that indicates the proportion of the accounts receivable balance that has been outstanding for a specified period of time.2.2008) 14 | P a g e .1984) Rising credit sales will result in a schedule exhibiting increasing values in the younger categories.day credit term may indicate a poorly managed credit or collection department or both.(Fess. The total sum must be be 100%. and a misleading suggestion of increased collection efficiency for the older categories Leitch The schedule may be prepared as follows. (Gallinger.1986) The deficiency of aging technique rises as its interdependence is reality and when changes in credit sales occur. most debts should be younger. and few should be older.greater than the 30.(Leitch. By highlighting irregularities it allows the analyst to pinpoint the cause of credit or collection problems.2010) The objective of preparing an aging schedule is to have a closer look at the quality of individual accounts this requires as ascertaining the sales made to payment received from each customer by checking the receivable ledgers.4.

1 .. 60 61. 90 91.... 825 $ 2... 000 $ 12. 30 31....9 9.400 $ 8.2010 Balance of Percentage of receivables $ 10... (Bernstein.40 10.10 100 2.2009 Balance of Percent Age classes Month sales December November October September earlier total of receivables (days) 1..... Whenever credit is extended the likelihood exists that some receivables will not be collected and this factor should be recognized in the valuation of receivable on the balance sheet.20 3.. 850 receivables 11..... 550 $ 46.350 $ 13...8 10.000 receivables 22..11 0 >121 $ 25..000 $ 62..5 100 As on December 31...000 $ 500 $ 110. The uncertainty of collection affects the value of receivable.1984) Business enterprises sell on credit in order to increase sales..7 56..5 Valuation of account receivables The major account problems associated with the valuation of account receivables are the initial recording of the receivable based on the expected future cash flows and the estimation of the probability of collection....(Fess... 1996).000 $ 10... ..40 53. but it must be recognized that credit sales create the need for a credit department to investigate credit ratings approve the 15 | P a g e .700 $ 86.Example of Aging schedule of receivables As on December 31...90 21... Most credit sales are made on unsecured days of accounts and the dollar amount of each sale is recorded as an account receivable.......

1. and attempt to collect delinquent accounts.1996) The problem of valuation of accounts receivable centers on three issues:- 1. The estimate of the probability that the receivable will be collected. The valuation of accounts receivable is related directly with the amount of revenue ultimately realized.5. The time of collection 3.(Walther.2009) When a company is considering whether to sell on credit it must consider the trade off between the additional gross profits received from the expected credit sales and the additional expenses and losses incurred due to these credit sales. Credit sales result in a certain amount of bad debt losses due to non.(Keiso. There is no way of measuring revenue independently of the value of claims resulting form revenue transactions.payment by customers.extension of credit. According to (Bernstein. Another factor to be considered in the valuation of receivable is the length of time until collection. 2. The amount due 2. Determining the amount due 16 | P a g e . 2010) In the case of a firm that has no experience of its own reference to the experience of other enterprises in the same business may be appropriate.

1984) 2.2010) Companies may offer another type of discount to induce prompt payment. No journal entry is made at the end of the accounting period to anticipate discounts that may be taken by customers on outstanding accounts receivables.1996) The list prices quoted in catalogs are often subject to discounts for purchases in excess of a certain quantity. 2. The procedure is particularly significant when the collection period is long and interest is not charged to customers.(Garllinger. Trade discounts (also known as volume or quantity) discounts are usually quoted as a percentage of the list price. Time of Collection Here there is a need to consider the length of the collection period and assign a present value to receivables. Estimating the probability of collection 17 | P a g e .(Fess.1986) Example:. They are used to establish a cash price when payment is received shortly after giving of service as distinct from a higher time payment price. (Keiso.2.3.00 is recognized during the period the receivable is outstanding. 500. the trade discount and the cash discount. This constitutes the list price of the credit.5.if receivable of 5.Determining the value of the credit is among the main factors that the valuation of the accounts receivable hard. (Bernstein.00 and interest revenue of $500. Trade discounts are usually re-suggested price for resale and it represents the difference between the list price and the price to the purchaser before cash discounts.00 is expected to be collected after one year and the interest rate is 10% the receivable and sales are recorded at a net amount of $ 5.5.000. If cash discounts are not taken only the initial entry is recorded.

Estimating of doubtful accounts expense based on sales 18 | P a g e . A third major valuation problem is to evaluate the probability that customers will be willing and able to pay their accounts. The analysis of the quality and age of outstanding receivables at the end of an accounting period. The average relationship between sales and un-collectible account in past years. (Leitch.In the previous we have considered the problem of determining the amount due and the time of collection under the terms of credit sales.5. The objective in the estimation of doubtful accounts expenses is to prevent an overstatement of assets and revenue in the accounting period in which sales are made. Receivables that will never be collected have a zero present value and the corresponding revenue will no be realized.2008 and Fess. Even the best efforts of a capable credit department can't eliminate all un-collectible accounts.1984) Two kinds of evidence are used in estimates of doubtful expenses:1.1998) In practice doubtful accounts usually appears among operating expenses.(Walther. 2.(James.1984) The managerial objective is to maximize net income and not to maximize un-collectible expenses. Finally it is considered as a financial management item and report is a "other expense". Too stringent a credit policy may cause loss of sales volume which more than off sets the reduction in the doubtful accounts expenses.(Fess.

2008) example: if sales for the lst quarter of the current year are $50. (Hoyle. the estimate of doubtful accounts expense should be based on credit sales. This procedure is known as a balance sheet approach of estimating doubt full accounts expense.1991) 2.(Income statement approach) The average percentage of credit sales not collected in past accounting period is a logical basis for estimating the portion of current credit sales that will prove un-collectible. estimate of doubtful accounts expense as a percentage of total sales my produce reasonably accurate results. This approach often referred to as the income statement approach. Estimating of doubtful accounts expense Based on receivable (Balance Sheet Approach) A good way to test the adequacy of the allowance for doubtful accounts and to recognize the current charge against revenue is to make an analysis of accounts by age group and probability of collection. the following journal entry is required:Doubtful accounts expense Allowance for doubtful accounts 500 500 If the ratio of cash sales to credit sales is relatively constant.000.(Walther. is simple to apply and makes possible an estimate of doubtful accounts expenses as soon as credit sales are recorded. Strictly speaking however.5.2. (Keiso.00 and doubtful accounts expense is estimated at 1% of sales .2010) 19 | P a g e .(Keiso.2010) It results in a sound matching of costs and revenue and is especially appropriate in the preparation of interim reports.3.

(Leitch. An estimate of the average collection experience for each age class provides a basis for estimating the portion of outstanding accounts receivable that may prove to be uncollectible.Generally a significant correlation exists between the length of time an account is past due and its collectibles.2009) 20 | P a g e . The number of different age classes to be used depends on the actual experience and the terms of sale. A summary which classifies the balance of all accounts receivables according to whether the amounts are not yet due or past due by varying lengths of time is known as an aging of accounts receivable.

I.000 23700 1 13000 21 | P a g e .000 Internet services 7 weeks 400 2800 Audio cassette tapes Stationery Laptop Computer Total 10 40 1500 400 1500 13.500 Total 6. Budget and Time Schedule Item Transportation Quantity 4 weeks Cost 1.

2011 Literature Review Interview Questionnaire schedule development Data collection Data analysis Report writing and 2 3 4 Week 5 6 7 22 | P a g e .Activity August 1-September 1 18.

Cincinnati. McGraw-Hill. South western publishing Co. Oxford University. Cincinnati. Inc.Advanced Accounting. 1991. What You Sell Is What You Lend? Explaining Trade Credit Contracts The Review of Financial Studies / v 24 n 4 2011.John Wiley and Sons. A Weighted Cash Conversion Cycle. Kieso. New York. Ohio. Joe B.Reference 1. Modern Advanced accounting. 8.14th edition. working paper.Horne. 4. Walther. Bernstein . New York.2008.1996. Journal of The Financial Management Association Volume 19/ 1 Spring 1990 5. 7. 2.Accounting Principles.Principles of Accounting.Warfield.USA 9. Vaidyanathan. 23 | P a g e . Refining measures to improve performance measurement of the accounts receivable collection function.Warren 1984. 7th edition McGraw-Hill. James .com. Giannetti Burkart Ellingsen. Gentry.2008. Leitch and Lamminmaki 2009.Weygandt. Hoyle. 6. Intermediate accounting. Griffith Business College 3. Ohio.financial Management & Policy South western publishing Co. and Lee 1990. Fess. 2010. 1998.

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