The theoretical valuation of receivables is the present value of expected future cash flows. However, trade receivables are not discounted owing to materiality considerations; hence, their net realizable value is the closest practical approximation to the theoretical valuation.

Required:
a. Define net realizable value.
b. The allowance method of accounting for bad debts may use an income statement or a balance sheet approach.
i. Which approach provides the best estimate of net realizable value? Explain.
ii. Working capital is intended to provide a measure of liquidity. Which approach provides a better measure of liquidity? Explain.
iii. Which approach is consistent with the matching concept? Explain.
iv. Which approach is consistent with the definition of comprehensive income? Explain.
v. Which approach is more consistent with the concept of financial capital maintenance? Explain.
vi. Which approach is more consistent with the concept of physical capital maintenance? Explain.