202. Uncollectible accounts
(a.) What is an uncollectible account? Explain how a business suffers losses from uncollectible accounts.
(b.) “A competent credit manager should set credit policies so as to avoid any and all losses from uncollectible accounts.” Is this statement accurate? Explain your answer.

(a) An uncollectible account is an account receivable that a business is unable to collect. An account receivable that has been determined to be uncollectible is no longer an asset. A business suffers a loss from an uncollectible account because it has provided services or exchanged merchandise for an asset (the account receivable) that now is worthless. The loss is in terms of cash flow but uncollectible accounts do not appear as a loss on the income statement.
(b) This statement is false. If the credit manager becomes overly cautious and conservative in extending credit in order to avoid all credit losses, he or she might lose a greater amount of profitable business by rejecting many acceptable customers.

203. Evaluating the quality of receivables
(a.) The 2010 annual report of Modern Books, a publicly traded corporation, reports accounts receivable (net of allowance for doubtful accounts), of $190,714 as of February 28, 2010. What assurance do readers of Modern Books' annual report have that these receivables really exist and are not fictitious assets recorded to make the balance sheet “look good”?
(b.) The accounts receivable turnover rate is frequently used in evaluating the liquidity of accounts receivable. How is the accounts receivable turnover rate computed? What type of information does the accounts receivable turnover rate provide?