Alcatel Accounting Case

A. What is an account receivable? What other names does it go by?

Accounts receivable are amounts owed by customers on account. They result from the sale of goods and services on credit. These receivables are generally expected to be collected within 30 to 60 days. They are typically the most significant type of claim held by a company. Accounts receivable and notes receivable resulting from sales are also known as trade receivables. Accounts receivable resulting from sales are referred to as trade receivables in Alcatel's financial statements.

B. How do accounts receivable differ from notes receivable?

Notes receivable represent claims for which formal instruments of credit are issued as evidence of debt. A credit instrument normally requires a debtor to pay interest and extends for time periods of 60 to 90 days or longer. Notes receivable differ from accounts receivable due to the fact that notes receivable are secured by promissory notes and not through accounts. Notes receivable also requires the debtor to pay interest. The collection period for notes receivable generally extends for 60 to 90 days or longer, whereas accounts receivable are generally expected to be collected in 30 to 60 days .

C. Alcatel's balance sheet reports a balance for trade receivables and related accounts, net. What are the trade receivables net of?

Trade receivables are stated at the cash (net) realizable value on the balance sheet. Gross trade receivables are therefore reduced by the estimated uncollectible receivables (referred to as allowance for doubtful accounts) through the allowance method before being presented on the balance sheet.

D. If Alcatel anticipates that some accounts are uncollectible, why did the company extend credit to those customers in the first place? Discuss the risks that must be managed with respect to accounts receivable and vendor financing?

Alcatel, like others in the telecommunications industry, offered products to many customers who may have seemed risky because of the need to expand telecommunications network in Europe. Although these actions were risky, they were needed to help push the communications bubble further.

For most firms the optimal amount of uncollectibles is not zero. For Alcatel to have no uncollectible accounts they would have to use a very strict credit policy and would most likely not be able to sell to as many as customers. Enforcing this policy would be very costly and they would likely eliminate many customers who would pay their bills but would not be able to pass a credit check. On the other hand if Alcatel's credit policy is too loose they risk having too many customers who will not pay or will pay late. Alcatel was able to manage some of these risks and generate cash immediately by selling a portion of their receivables to banks and financial firms. Other steps that can be taken to manage the risk of uncollectible accounts include: requiring risky customers to provide letters of credit or bank guarantees, requiring particularly risky customers to pay cash on delivery, asking potential customers for references from banks and suppliers to determine their payment history, and continually checking the financial health of regular customers.

E. Process

Allowance For Doubtful Accounts (Trade Receivable)

4) Write-offs Ђ 115 Ђ 928 Dec. 31, 2001

279 3) Bad Debt

1,092 Dec. 31, 2002

Trade Receivables - Gross

Dec. 31, 2001 9,033 19,657 2) Collections

1) Sales 16,547 115 4) Write-offs

Dec. 31, 2002 5,808

Account Titles Debit Credit

1 Trade Receivables - Gross Ђ 16,547

Sales Revenue Ђ 16,547

(Recorded Sales)

2 Cash 19,657

Trade Receivables - Gross 19,657