Receivables are the amount of money due to the company for provided services or sold products. In its annual report, Starbucks (2021) stated that the company’s receivables include mainly money due for sold products and equipment. In FY2020, Starbucks allowed extensions on credit to its customers due to the pandemic (Starbucks, 2021). However, the company’s management does not believe that this will affect the company’s future collectability or revenue recognition policy.
Receivables are recognized as current assets, which implies that they are included in both liquidity and solvency ratios. They are included in the current ratio, quick ratio, and the acid-test ratio as the numerator, which implies the higher the receivables, the higher the company’s liquidity (Hayes, 2021a). In the solvency ratio, receivables are included in the total assets, which is the denominator (Hayes, 2021b). This implies that the higher the receivables, the lower is the recognized financial leverage. In both cases, higher receivables are preferred, as they are considered one of the most liquid assets.
Some companies prefer to use net receivables, while others use total receivables. Total receivables include bad debt, while net receivables are defined as “net receivables are the total money owed to a company by its customers minus the money owed that will likely never be paid” (Kenton, 2020, para. 1). Using total receivables has a significant impact on solvency and liquidity calculations if the bad debt is high. In case the company reports total receivables, the higher the bad debt the more preferable are the liquidity and solvency ratios. However, it is just a manipulation, as bad debt will never be paid off.
References
Hayes, A. (2021a). Liquidity ratios. Investopedia. Web.
Hayes, A. (2021b). Solvency ratio. Investopedia. Web.
Kenton, W. (2020). Net receivables. Investopedia. Web.
Starbucks. Annual report 2021.Web.