Trade recevables

CFA Level I FRA
#1

Trade receivables are most commonly reported at:

  1. net realizable value.
  2. net present value.
  3. face value.

Solution

A is correct. Trade receivables are amounts owed to a company by its customers for products and services already delivered. They are typically reported at net realizable value, an approximation of fair value based on estimates of collectability.

B is incorrect. Present value is the present discounted value of future net cash inflows that the asset is expected to generate in the normal course of business. Trade receivables are typically reported at net realisable value.

C is incorrect. Face value would not account for the potential for uncollectability. Trade receivables are typically reported at net realisable value.

why the answer cannot be c " face value"???

#2

As it says, face value does not account for the potential for uncollectability.

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#3

Because some receivables might be uncollectable, due to problems or bad credit etc.

#4

And the matching principle requires you to match the uncollectable amount against (i.e., subtract it from) the gross amount (which is the face value) at the time you record the receivable.

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