Answered: Effective credit management involves…

Principles of Accounting Volume 1

19th Edition

ISBN:9781947172685

Author:OpenStax

Publisher:OpenStax

Chapter9: Accounting For Receivables

Section: Chapter Questions

Problem 3MC: If a customer pays with a credit card and the service has been provided, which of the following...

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Effective credit management involves establishing credit standards for extending credit to customers, determining the company’s terms of credit, and setting up procedures for invoicing and collecting past-due accounts.

The following statement refers to a credit management policy. Select the best term to complete the sentence.

The conditions of the credit sale, including cash discounts and due dates, are indicated by the company’s (______) .

Consider the case of Newtown Co.:

Newtown Co.’s CFO has decided to take a closer look at the company’s credit policy. Newtown Co. has annual sales of $402.8 million, and it currently has an accounts receivable balance of $47.6 million. The first step in analyzing the firm’s credit policy is to determine its days sales outstanding (DSO).

Based on this information, Newtown Co.’s DSO is (_____) . (Note: Use 365 days as the length of a year in all calculations. Do not round intermediate calculations. Round your answer to one decimal place.)

The average DSO for Newtown Co.’s industry is 51.2 days. Assuming that its sales stayed the same, what would be Newtown Co.’s receivables balance if it maintained the industry average DSO? (_____) (Note: Do not round intermediate calculations. Round your answer to the nearest whole dollar.)

Newtown Co.’s CFO thinks that the company has not done a very good job of enforcing its credit policy. The CFO believes that if the company were to better enforce its credit policy, it would reduce its DSO to 30 days; however, this will cause Newtown Co. to lose 3% of its sales revenue. What would Newtown Co.’s expected accounts receivables balance be if it decides to tighten its credit policy? (Note: Do not round intermediate calculations. Round your answer to the nearest whole dollar.)

$40,142,055

$32,113,644

$30,507,962

$36,930,691

Expert Solution

Step 1

Company provide credit to customers and discount to customers to increase sales.

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