Concept explainers
1.
Calculate the
1.
Explanation of Solution
Profitability Ratio:
These ratios evaluate a firm’s ability to earn profits. They help the stakeholders of the company to measure the degree to which funds invested by them are efficiently used. Some of the ratios calculated return on sales, total assets and
Use the following formula to calculate the value of accounts receivable turnover in times for year 20X2:
Substitute $500,000 for net sales and $100,000 for average receivable in the above formula.
Therefore, the value of accounts receivable turnover in times is 5 times.
Use the following formula to calculate the value of accounts receivable turnover in days for year 20X2:
Substitute 365 days for days in a year and 5.00 times for average accounts receivable turnover in days in the above formula.
Therefore, the value of accounts receivable turnover in days is 73.00 days.
Use the following formula to calculate the value of accounts receivable turnover in times for year 20X3:
Substitute $600,000 for net sales and $110,000 for average receivable in the above formula.
Therefore, the value of accounts receivable turnover in times is 5.45 times.
Use the following formula to calculate the value of accounts receivable turnover in days for year 20X3:
Substitute 365 days for days in a year and 5.45 times for average accounts receivable turnover in days in the above formula.
Therefore, the value of accounts receivable turnover in days is 66.97 days.
Use the following formula to calculate the value of accounts receivable turnover in times for year 20X4:
Substitute $510,000 for net sales and $110,000 for average receivable in the above formula.
Therefore, the value of accounts receivable turnover in times is 4.64 times.
Use the following formula to calculate the value of accounts receivable turnover in days for year 20X4:
Substitute 365 days for days in a year and 4.64 times for average accounts receivable turnover in days in the above formula.
Therefore, the value of accounts receivable turnover in days is 78.66 days.
Use the following formula to calculate the value of accounts receivable turnover in times for year 20X5:
Substitute $510,000 for net sales and $125,000 for average receivable in the above formula.
Therefore, the value of accounts receivable turnover in times is 4.08 times.
Use the following formula to calculate the value of accounts receivable turnover in days for year 20X5:
Substitute 365 days for days in a year and 4.08 times for average accounts receivable turnover in days in the above formula.
Therefore, the value of accounts receivable turnover in days is 89.46 days.
Use the following formula to calculate the value of accounts receivable turnover in times for year 20X6:
Substitute $520,000 for net sales and $170,000 for average receivable in the above formula.
Therefore, the value of accounts receivable turnover in times is 3.06 times.
Use the following formula to calculate the value of accounts receivable turnover in days for year 20X6:
Substitute 365 days for days in a year and 3.06 times for average accounts receivable turnover in days in the above formula.
Therefore, the value of accounts receivable turnover in days is 119.28 days.
Working Note:
1. Calculation of average receivable:
2. Calculation of average receivable:
3. Calculation of average receivable:
4. Calculation of average receivable:
5. Calculation of average receivable:
2.
Explain the effect of the new credit policy with the help of above calculations.
2.
Explanation of Solution
Accounts receivable turnover decreased due to new credit policy because customers have 60 days to make full payment. As a result, it reduced the inflow of cash in the company. It also led to a shortage of cash due to which the company is unable to meet its short term requirements.
3.
Identify whether TP would have liberalized his company’s credit policy if it was known that industrial average was 6 times.
3.
Explanation of Solution
TP would not have liberalized the company’s credit policy if industrial average was known as accounts receivable turnover was already low as compared to the industry average.
Want to see more full solutions like this?
Chapter 15 Solutions
CENGAGENOWV2 FOR MOWEN/HANSEN/HEITGER S
- Block Foods, a retail grocery store, has agreed to purchase all of its merchandise from Square Wholesalers. In return. Block receives a special discount on purchases. Over recent months, Square noticed that purchases by Block had been falling off. At first, Square simply thought that business might be down for Block and was hopeful that their purchases would pick up. When business with Block did not return to a normal level, Square requested financial statements from Block. Squares records indicate that Block purchased 300,000 worth of merchandise during 20-1, the most recent year. Selected information taken from Block's financial statements is as follows: REQUIRED Compute net purchases made by Block during 20-1. Does it appear that Block violated the agreement?arrow_forwardAs the accountant for Pure-Air Distributing, you attend a sales managers’ meeting devoted to a discussion of credit policies. At the meeting, you report that bad debts expense is estimated to be $59,000 and accounts receivable at year-end amount to $1,750,000 less a $43,000 allowance for doubtful accounts. Sid Omar, a sales manager, expresses confusion over why bad debts expense and the allowance for doubtful accounts are different amounts. Write a one-page memorandum to him explaining why a difference in bad debts expense and the allowance for doubtful accounts is not unusual. The company estimates bad debts expense as 2% of sales.arrow_forwardAs the accountant for Clean Air Controls, you attend a meeting with the sales managers to discuss credit policies. At the meeting, you report that bad debts expense for the year is estimated to be $85,000 and account receivables at year end is $1,500,000 less a $57,000 allowance for doubtful accounts. Arthur Levitt, a sales manager, asks why bad debts expense and the allowance are not the same amount. Required 1. Write a professional email explaining this concept to Arthur. The company estimates bad debts expense as 3% of sales.arrow_forward
- McGriff Dog Food Company normally takes 28 days to pay for average daily credit purchases of $9,540. Its average daily sales are $10,710, and it collects accounts in 32 days.a. What is its net credit position? b-1. If the firm extends its average payment period from 28 days to 38 days (and all else remains the same), what is the firm's new net credit position? (Negative amount should be indicated by a minus sign.)arrow_forwardSway Tailors currently has credit terms of net 30, an average collection period of 29 days, and average receivables of $211,410. The firm estimates that if it offered terms of 2/10, net 30 that 45 percent of its customers would pay on Day 10 with the remainder paying on average in 32 days. How much cash could the company free up from its accounts receivables if it switched its credit policy? Multiple Choice O $65,009 O $38,762 $58,336 ↓yarrow_forwardBrecha Hogan is president of Hogan Company, a manufacturer of toys for children. For the past 10 years, the company has sold its product to both wholesale and retail dealers of toys in the northeast United States. Over the years, the company has come to know its customers well. While all sales are made on credit, few credit losses have occurred. The company’s experience has shown that an annual provision for uncollectible accounts of 0.3 of 1 percent of sales is adequate in the old territory.Early in 20X1, Hogan Company decided to expand and develop a new sales base in the southeastern United States. Hogan was pleased when credit sales of $870,000 were achieved in the new territory during the year. To achieve this level of sales and get a foothold in the new territory, though, credit was allowed to some customers with lower credit ratings than had been granted in the past. Given its liberal credit policies in the new territory Hogan estimates that the provision in the new territory…arrow_forward
- Brecha Hogan is president of Hogan Company, a manufacturer of toys for children. For the past 10 years, the company has sold its product to both wholesale and retail dealers of toys in the northeast United States. Over the years, the company has come to know its customers well. While all sales are made on credit, few credit losses have occurred. The company’s experience has shown that an annual provision for uncollectible accounts of 0.3 of 1 percent of sales is adequate in the old territory.Early in 20X1, Hogan Company decided to expand and develop a new sales base in the southeastern United States. Hogan was pleased when credit sales of $870,000 were achieved in the new territory during the year. To achieve this level of sales and get a foothold in the new territory, though, credit was allowed to some customers with lower credit ratings than had been granted in the past. Given its liberal credit policies in the new territory Hogan estimates that the provision in the new territory…arrow_forwardBrecha Hogan is president of Hogan Company, a manufacturer of toys for children. For the past 10 years, the company has sold its product to both wholesale and retail dealers of toys in the northeast United States. Over the years, the company has come to know its customers well. While all sales are made on credit, few credit losses have occurred. The company’s experience has shown that an annual provision for uncollectible accounts of 0.3 of 1 percent of sales is adequate in the old territory.Early in 20X1, Hogan Company decided to expand and develop a new sales base in the southeastern United States. Hogan was pleased when credit sales of $870,000 were achieved in the new territory during the year. To achieve this level of sales and get a foothold in the new territory, though, credit was allowed to some customers with lower credit ratings than had been granted in the past. Given its liberal credit policies in the new territory Hogan estimates that the provision in the new territory…arrow_forwardBrecha Hogan is president of Hogan Company, a manufacturer of toys for children. For the past 10 years, the company has sold its product to both wholesale and retail dealers of toys in the northeast United States. Over the years, the company has come to know its customers well. While all sales are made on credit, few credit losses have occurred. The company’s experience has shown that an annual provision for uncollectible accounts of 0.3 of 1 percent of sales is adequate in the old territory.Early in 20X1, Hogan Company decided to expand and develop a new sales base in the southeastern United States. Hogan was pleased when credit sales of $870,000 were achieved in the new territory during the year. To achieve this level of sales and get a foothold in the new territory, though, credit was allowed to some customers with lower credit ratings than had been granted in the past. Given its liberal credit policies in the new territory Hogan estimates that the provision in the new territory…arrow_forward
- Brecha Hogan is president of Hogan Company, a manufacturer of toys for children. For the past 10 years, the company has sold its product to both wholesale and retail dealers of toys in the northeast United States. Over the years, the company has come to know its customers well. While all sales are made on credit, few credit losses have occurred. The company’s experience has shown that an annual provision for uncollectible accounts of 0.3 of 1 percent of sales is adequate in the old territory.Early in 20X1, Hogan Company decided to expand and develop a new sales base in the southeastern United States. Hogan was pleased when credit sales of $870,000 were achieved in the new territory during the year. To achieve this level of sales and get a foothold in the new territory, though, credit was allowed to some customers with lower credit ratings than had been granted in the past. Given its liberal credit policies in the new territory Hogan estimates that the provision in the new territory…arrow_forwardDBA 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…arrow_forwardTurkeyen Inc. had opening receivables of $5,000. With the hire of a new credit controller their collections for the period was $20,000. If the ending receivables balance was $4,000, what was the sales for the period?arrow_forward
- Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage LearningCollege Accounting, Chapters 1-27AccountingISBN:9781337794756Author:HEINTZ, James A.Publisher:Cengage Learning,EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage LearningManagerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubCollege Accounting (Book Only): A Career ApproachAccountingISBN:9781337280570Author:Scott, Cathy J.Publisher:South-Western College Pub