Suppose a company’s current credit terms are 1/10,net 30, but management is considering changingits terms to 2/10, net 40, relaxing its credit standards, and putting less pressure on slow-payingcustomers. How would you expect these changesto affect (a) sales, (b) the percentage of customerswho take discounts, (c) the percentage of customers who pay late, and (d) the percentage of customers who end up as bad debts?

Suppose a company’s current credit terms are 1/10,net 30, but management is considering changingits terms to 2/10, net 40, relaxing its credit standards, and putting less pressure on slow-payingcustomers. How would you expect these changesto affect (a) sales, (b) the percentage of customerswho take discounts, (c) the percentage of customers who pay late, and (d) the percentage of customers who end up as bad debts?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter18: The Management Of Accounts Receivable And Inventories

Section: Chapter Questions

Problem 15P

See similar textbooks

Similar questions

Which of the following best represents a positive product of a lower number of days sales in receivables ratio? A. collection of receivables is quick, and cash can be used for other business expenditures B. collection of receivables is slow, keeping cash secured to receivables C. credit extension is lenient D. the lender only lends to the top 10% of potential creditors
Shimmer Products is considering which bad debt estimation method works best for its company. It is deciding between the income statement method, balance sheet method of receivables, and balance sheet aging of receivables method. If it uses the income statement method, bad debt would be estimated at 5.6% of credit sales. If it were to use the balance sheet method, it would estimate bad debt at 13.7% percent of accounts receivable. If it were to use the balance sheet aging of receivables method, it would split its receivables into three categories: 0â€“30 days past due at 5%, 31â€“90 days past due at 21%, and over 90 days past due at 30%. There is currently a zero balance, transferred from the prior years Allowance for Doubtful Accounts. The following information is available from the year-end income statement and balance sheet. There is also additional information regarding the distribution of accounts receivable by age. Prepare the year-end adjusting entry for bad debt, using A. Income statement method B. Balance sheet method of receivables C. Balance sheet aging of receivables method D. Which method should the company choose, and why?
Organics Plus is considering which bad debt estimation method works best for its company. It is deciding between the income statement method, balance sheet method of receivables, and balance sheet aging of receivables method. If it uses the income statement method, bad debt would be estimated at 4% of credit sales. If it were to use the balance sheet method, it would estimate bad debt at 12% of accounts receivable. If it were to use the balance sheet aging of receivables method, it would split its receivables into three categories: 0â€“30 days past due at 6%, 31â€“90 days past due at 19%, and over 90 days past due at 26%. There is currently a zero balance, transferred from the prior years Allowance for Doubtful Accounts. The following information is available from the year-end income statement and balance sheet. There is also additional information regarding the distribution of accounts receivable by age. Prepare the year-end adjusting entry for bad debt, using A. Income statement method B. Balance sheet method of receivables C. Balance sheet aging of receivables method. D. Which method should the company choose, and why?
Everbusiness Corporation has been reviewing its credit policies. The credit standard it has been applying have resulted in an annual credit sales of $5,000,000.00. Its average collection period is 30 days with a bad debts/loss ratio of 1%. Everbusiness Corporation is considering a reduction in its credit standards. As a result, it expects incremental credit sales of $400,000.00 of which the average collection period would be 60 days, in which the bad BCR to sales for Everbusiness Corporation is 70%. The required investment on receivables is 15%. Evaluate the relaxation in credit standards that Everbusiness Corporation is considering. Use 0.04% per year/365 days. Provide detailed explanation and solutions.
DBA Company is considering changing its credit terms from 2/15, net 30 to 3/10, net 30 in order to speed collections. At present, 40% of Sonata Company‘s customers take the 2% discount. Under the new term, discount customers are expected to rise to 50%. Regardless of the credit terms, half of the customers who do not take the discount are expected to pay on time, whereas the remainder will pay 10 days late. The change does not involve a relaxation of credit standards; therefore bad debt losses are not expected to rise above their present 2% level. However, the more generous cash discount terms are expected to increase sales from P2 million to P2.6 million per year. DBA’s variable cost ratio is 75%, the interest rate on funds invested in accounts receivable is 9 %, and the firm’s income tax rate is 40%. Required: What is the days sales outstanding (DSO) before the change of credit policy? What is the days sales outstanding (DSO) after the change of credit policy? How much is the…
If a firm's current ratio and quick ratio have been steadily decreasing, the underlying cause might be traced to their credit manager's relaxed attitude about enforcing prompt payment from customers.
As treasurer of the Universal Bed Corporation, Aristotle Procrustes is worried about his bad debt ratio, which is currently running at 6.7%. He believes that imposing a more stringent credit policy might reduce sales by 5% and reduce the bad debt ratio to 4.7%. Assume current sales are $100. a. If the cost of goods sold is 73% of the selling price, what is the expected profit on the current credit policy? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. If the cost of goods sold is 73% of the selling price, what is the expected profit on the more stringent credit policy? (Do not round intermediate calculations. Round your answer to 2 decimal places.) c. Should Mr. Procrustes adopt the more stringent policy?
As treasurer of the Universal Bed Corporation, Aristotle Procrustes is worried about his bad debt ratio, which is currently running at 6.7%. He believes that imposing a more stringent credit policy might reduce sales by 5% and reduce the bad debt ratio to 4.7%. Assume current sales are $100. a. If the cost of goods sold is 73% of the selling price, what is the expected profit on the current credit policy? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. If the cost of goods sold is 73% of the selling price, what is the expected profit on the more stringent credit policy? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Organics Plus is considering which bad debt estimation method works best for its company. It is deciding between the income statement method, balance sheet method of receivables, and balance sheet aging of receivables method. If it uses the income statement method, bad debt would be estimated at 4 percent of credit sales. If it were to use the balance sheet method, it would estimate bad debt at 12 percent of accounts receivable. If it were to use the balance sheet aging of receivables method, it would split its receivables into three categories: 0–30 days past due at 6 percent, 31–90 days past due at 19 percent, and over 90 days past due at 26 percent. There is currently a zero balance, transferred from the prior year’s Allowance for Doubtful Accounts. The following information is available from the year-end income statement and balance sheet. 2018 Year-End Total for Organics Plus Credit Sales $1,810,000 Accounts Receivable 600,000 There is also additional information…
What should a company do to improve its accounts receivable turnover rate? increase its sales force give customers credit terms of 2/10, n/30, rather than 1/10, n/30 lower its selling prices reduce the number of employees working in the credit department
Knights Technologies is considering changing its credit terms from 2/15, n/30 to 3/10, n/30 to speed collections. At present 40% of Knights paying customers take the 2% discount. Under the new terms, discount customers are expected to rise to 50%. Regardless of the credit terms, half of the customers who would not take discount are expected to pay on time, whereas the remainder will pay 10 days late. The change does not involve a relaxation of the credit standards; therefore, bad debts losses are not expected to rise above their present 2% level. However, the more generous cash discount terms are expected to increase sales from P2 million to P2.6 million per year. Knights variable cost ratio is 75%, the interest rate on funds invested in accounts receivable with production and credit sales is 9% and the firms marginal tax rate is 40%. All costs associated with production and credit sales are paid in the day of sales. What is the DSO before and after the change? Calculate the cost of…
Knights Technologies is considering changing its credit terms from 2/15, n/30 to 3/10, n/30 to speed collections. At present 40% of Knights paying customers take the 2% discount. Under the new terms, discount customers are expected to rise to 50%. Regardless of the credit terms, half of the customers who would not take discount are expected to pay on time, whereas the remainder will pay 10 days late. The change does not involve a relaxation of the credit standards; therefore, bad debts losses are not expected to rise above their present 2% level. However, the more generous cash discount terms are expected to increase sales from P2 million to P2.6 million per year. Knights variable cost ratio is 75%, the interest rate on funds invested in accounts receivable with production and credit sales is 9% and the firms marginal tax rate is 40%. All costs associated with production and credit sales are paid in the day of sales. What is the DSO before and after the change? Calculate the cost of…