PRIN.OF CORPORATE FINANCE >BI<
12th Edition
ISBN: 9781260431230
Author: BREALEY
Publisher: MCG CUSTOM
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Chapter 30, Problem 20PS
Summary Introduction
To recalculate: The effect of variations in the credit terms
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To increase its sales, a company decides to increase its credit terms from 15 to 30 days. What effect will this change in policy have on receivables turnover and days' sales uncollected?
The sales director of ABC Corp suggest the following credit terms. He estimated the following:Sales will increase by at least 20%AR turnover will be reduced to 8 times from present turnover of 10 times.Bad debts will increase to 1.5%. Current bad debts are 1%.Current sales is P 900,000Variable cost ratio is 55%.Desired rate of return is 20%Fixed expenses is P 150,000What is the net advantage of changing the credit terms?
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
Chapter 30 Solutions
PRIN.OF CORPORATE FINANCE >BI<
Ch. 30 - Inventory What are the trade-offs involved in the...Ch. 30 - Prob. 2PSCh. 30 - Prob. 3PSCh. 30 - Prob. 4PSCh. 30 - Prob. 5PSCh. 30 - Prob. 6PSCh. 30 - Prob. 7PSCh. 30 - Credit policy How should your willingness to grant...Ch. 30 - Cash management Complete the passage that follows...Ch. 30 - Prob. 10PS
Ch. 30 - Prob. 11PSCh. 30 - Prob. 12PSCh. 30 - Prob. 13PSCh. 30 - Prob. 14PSCh. 30 - Credit terms Phoenix Lambert currently sells its...Ch. 30 - Prob. 16PSCh. 30 - Prob. 17PSCh. 30 - Prob. 18PSCh. 30 - Prob. 19PSCh. 30 - Prob. 20PSCh. 30 - Prob. 21PSCh. 30 - Prob. 22PSCh. 30 - Prob. 23PSCh. 30 - Prob. 24PSCh. 30 - Prob. 25PSCh. 30 - Money-market yields In Section 30-4 we described a...Ch. 30 - Money-market yields Look again at the previous...Ch. 30 - Prob. 29PSCh. 30 - Prob. 30PSCh. 30 - Prob. 31PSCh. 30 - Prob. 33PS
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- Ned Sdn Bhd's trade receivable days have been getting shorter in recent years. Which of the following actions is likely to result in trade receivables days getting longer? A Negotiating longer credit terms with the company's main customer. B Decreasing inventory levels. C Sending reminder letters as soon as the debt is due. D Offering a discount for prompt payment.arrow_forwardWhat relationship exists between the average collection period and accounts receivable turnover? Select one: a. There is a direct and proportional relationship. b. Both ratios are expressed in number of days. c. As average collection period increases (decreases) the accounts receivable turnover decreases (increases). d. Both ratios are expressed in number of times receivables are collected per year.arrow_forwardABC is deciding if credit should be extended to its customers. It has determined that there is a 95% probability that it would collect the full payment from a credit sale in one month. The receivable is financed at an APR of 7.10%. On credit sales of $3,000 per unit, the present value of costs are expected to be 84.50% of the sales price. What is the present value of the expected profit on the sale of each unit? Explain with all steps a.-$16.76 b.-$166.76 c.$126.06 d.$254.90 e.$298.24arrow_forward
- Bulldogs Inc. had credit sales last year amounted to P18,600,000. The firm also had an average accounts receivable balance of P1,380,000. Credit terms are 2/10, n/30. Bulldogs’ average collection period last year was (Use 360-day year) 26.71 days. 27.32 days. 26.22 days. 33.45 days. Which is correct with regards to the effects of restricting credit standards? An increase in recognition of doubtful accounts expense will probably happen Positive impact on the net profit can be noted from decline in the quantity of goods sold Investment in accounts receivable will likely increase Quantity of units sold will probably decrease and will result to a lower sales revenuearrow_forwardIf ABC Corporation has annual credit sales of Ᵽ990,000 and its average accounts receivable is Ᵽ100,000, how many is its average collection period? Assuming that receivable turnover rate increases by 25%, how much would then be the estimated change in accounts receivable.Solution:arrow_forwardThe Jeremy Flores Club has annual revenue of EUR 7 million and all sales are on account. Good credit and collection performance in the club industry result in a 30-day ACP (Average Collection Period). Assume a year has 365 days. Determine the maximum receivables balance the club can tolerate and still receive a good rating for credit and collections. If the Jeremy Flores Club is currently collecting receivables in 35 days, by how much must the receivable balance be reduced.arrow_forward
- If Gilmore's estimate of bad debts is correct (2.2% of credit sales) and the gross margin is 20%, by how much did Gilmore's income from operations increase assuming $150,000 of the sales would have been lost if credit sales were not offered?arrow_forwardChoose the letter of answer and provide solution A firm has total annual sales (all credit) of P25,000.00 and accounts receivable of P8,000.00. How rapidly (in how many days) must accounts receivable be collected if management wants to reduce the accounts receivable to P6,000.00? *a. 87.6 daysb. 97.6 daysc. 107.6 daysd. 102.5 dayse. 105.8 daysarrow_forwardPLEASE MAKE IT IN EXCEL AND SHOW THE FORMULAS (Take screenshots) La Resolana, S.A., has credit sales of $180,000 per year, with net payment terms of 30 days, which is also the average collection period. La Resolana does not currently offer any cash discounts, so customers take the 30 days to pay. What is the average accounts receivable balance? What is the accounts receivable turnover?arrow_forward
- 7.-What are the likely effects on sales of the following change in credit policy: A) Lower the salary level required of credit applicants. A) Decrease the discounts for prompt payment. B) Increase the percentage of uncollectible accounts. C) Decrease sales volumes D) Increase sales volumearrow_forwardUse the following information to answer the question that follow: Net Income : $205,000 Profit margin : 7.80% A/R : $151,642 Credit sales : 60% of total sales Compute the days’ sales in receivablesarrow_forwardWhich of the following statements is correct? When cost of goods sold as a percentage of sales increases, the gross profit margin will increase. If the gross profit margin increases from one year to the next, then the net profit margin will also increase from one year to the next. If the gross profit margin is the same for the current and past year, then sales and cost of goods sold in dollars did not change. It is possible that when cost of goods sold in dollars increases, cost of goods sold as a percentage of sales decreases.arrow_forward
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