Realizable Value

1. Understand that accounts receivable are reported at net realizable value.

2. Know that net realizable value is an estimation of the amount of cash to be collected from a particular asset.

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3. Appreciate the challenge that uncertainty poses in the reporting of accounts receivable.

4. List the factors to be considered by company officials when estimating the net realizable value of accounts receivable.

Question: The goal of financial accounting is to paint a fairly presented portrait of an organization that enables

decision makers to make a reasonable assessment of its financial health and future prospects. This likeness

should be communicated based on United States generally accepted accounting principles1(U.S. GAAP) with no

material misstatements included. The success of the conveyance is dependent on the ability of an organization’s

accountants to prepare financial statements that meet this rigorous standard.

Equally as important, every party analyzing the resulting statements must possess the knowledge necessary to

understand the multitude of reported figures and explanations. If appropriate decisions are to result based on this

information, both the preparer and the reader need an in-depth knowledge of U.S. GAAP.

For example, the asset section of the balance sheet produced by Dell Inc. as of January 30, 2009, indicates that

the company held “accounts receivable, net” amounting to $4.731 billion. What does this figure reflect according

to U.S. GAAP?

What information is communicated to decision makers about a company and its accounts receivable when a single

number such as $4.731 billion is reported?

Answer: One of the most satisfying results of mastering the terminology, rules, and principles of financial

accounting is the ability to understand the meaning of amounts and balances disclosed about an organization. In

magazines, newspapers, radio, television, and the Internet, such information is presented and analyzed daily. As

with any language, failure to comprehend elements of the discussion leaves the listener lost and feeling vulnerable.

However, following a reasonable amount of study, the informational content begins to make sense and quickly

becomes useful in arriving at logical financial decisions.

In previous chapters, the term “accounts receivable” was introduced to report amounts owed to a company by its

customers. Individual balances are generated by sales made on credit. According to U.S. GAAP, the figure that is

presented on a balance sheet for accounts receivable is its net realizable value—the amount of cash the company

estimates will be collected over time from these accounts.

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