Fundamentals Of Financial Accounting
6th Edition
ISBN: 9781259864230
Author: PHILLIPS, Fred, Libby, Robert, Patricia A.
Publisher: Mcgraw-hill Education,
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Textbook Question
Chapter 8, Problem 6SDC
Critical Thinking: Analyzing the Impact of Credit Policies
Problem Solved Company has been operating for five years as a software consulting firm. During this period, it has experienced rapid growth in Sales Revenue and in
put into place more stringent credit-granting and collection procedures that you expect will reduce receivables by approximately one-third by year-end. You have gathered the following data related to the changes (in thousands):
Required:
- 1. Compute, to one decimal place, the accounts receivable turnover ratio based on three different assumptions:
- a. The stringent credit policies reduce Accounts Receivable, Net and decrease Net Sales as projected in the table.
- b. The stringent credit policies reduce Accounts Receivable, Net as projected in the table but do not decrease Net Sales from the prior year.
- c. The stringent credit policies are not implemented, resulting in no change from the beginning of the year Accounts Receivable balance and no change in Net Sales from the prior year.
- 2. On the basis of your findings in requirement 1, write a brief memo to the chief financial officer explaining the potential benefits and drawbacks of more stringent credit policies and how they are likely to affect the accounts receivable turnover ratio.
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Your first major assignment after your recent promotion at Ice Nine involves overseeing the management of accounts receiv- be able and inventory. The first item that you must attend to in- volves a proposed change in credit policy that would involve relaxing credit terms from the existing terms of 1/50, net 70 to 2/60, net 90 in hopes of securing new sales. The management at Ice Nine does not expect bad debt losses on its current customers to change under the new credit policy. The following information should aid you in the analysis of this problem.
New sales level (all credit)
$8,000,000
Original sales level (all credit)
$7,000,000
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25%
Percent bad debt losses on new sales
8%
New average collection period
75 days
Original average collection period
60 days
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$50,000
Pre-tax required rate of return
15%
New percent cash discount
2%
Percent of customers taking the new cash discount
50%
Original percent cash…
Your first major assignment after your recent promotion at Ice Nine involves overseeing the management of accounts receiv- be able and inventory. The first item that you must attend to in- volves a proposed change in credit policy that would involve relaxing credit terms from the existing terms of 1/50, net 70 to 2/60, net 90 in hopes of securing new sales. The management at Ice Nine does not expect bad debt losses on its current customers to change under the new credit policy. The following information should aid you in the analysis of this problem.
New sales level (all credit)
$8,000,000
Original sales level (all credit)
$7,000,000
Contribution margin
25%
Percent bad debt losses on new sales
8%
New average collection period
75 days
Original average collection period
60 days
Additional investment in inventory
$50,000
Pre-tax required rate of return
15%
New percent cash discount
2%
Percent of customers taking the new cash discount
50%
Original percent cash…
Your first major assignment after your recent promotion at Ice Nine involves overseeing the management of accounts receiv- be able and inventory. The first item that you must attend to in- volves a proposed change in credit policy that would involve relaxing credit terms from the existing terms of 1/50, net 70 to 2/60, net 90 in hopes of securing new sales. The management at Ice Nine does not expect bad debt losses on its current customers to change under the new credit policy. The following information should aid you in the analysis of this problem.
New sales level (all credit)
$8,000,000
Original sales level (all credit)
$7,000,000
Contribution margin
25%
Percent bad debt losses on new sales
8%
New average collection period
75 days
Original average collection period
60 days
Additional investment in inventory
$50,000
Pre-tax required rate of return
15%
New percent cash discount
2%
Percent of customers taking the new cash discount
50%
Original percent cash…
Chapter 8 Solutions
Fundamentals Of Financial Accounting
Ch. 8 - What are the advantages and disadvantages of...Ch. 8 - Prob. 2QCh. 8 - Which basic accounting principles does the...Ch. 8 - Using the allowance method, is Bad Debt Expense...Ch. 8 - What is the effect of the write-off of...Ch. 8 - How does the use of calculated estimates differ...Ch. 8 - A local phone company had a customer who rang up...Ch. 8 - What is the primary difference between accounts...Ch. 8 - What are the three components of the interest...Ch. 8 - As of May 1, 2016, Krispy Kreme Doughnuts had...
Ch. 8 - Does an increase in the receivables turnover ratio...Ch. 8 - What two approaches can managers take to speed up...Ch. 8 - When customers experience economic difficulties,...Ch. 8 - (Supplement 8A) Describe how (and when) the direct...Ch. 8 - (Supplement 8A) Refer to question 7. What amounts...Ch. 8 - 1. When a company using the allowance method...Ch. 8 - 2. When using the allowance method, as Bad Debt...Ch. 8 - 3. For many years, Carefree Company has estimated...Ch. 8 - 4. Which of the following best describes the...Ch. 8 - 5. If the Allowance for Doubtful Accounts opened...Ch. 8 - 6. When an account receivable is recovered a....Ch. 8 - Prob. 7MCCh. 8 - 8. If the receivables turnover ratio decreased...Ch. 8 - Prob. 9MCCh. 8 - Prob. 10MCCh. 8 - Prob. 1MECh. 8 - Evaluating the Decision to Extend Credit Last...Ch. 8 - Reporting Accounts Receivable and Recording...Ch. 8 - Recording Recoveries Using the Allowance Method...Ch. 8 - Recording Write-Offs and Bad Debt Expense Using...Ch. 8 - Determining Financial Statement Effects of...Ch. 8 - Estimating Bad Debts Using the Percentage of...Ch. 8 - Estimating Bad Debts Using the Aging Method Assume...Ch. 8 - Recording Bad Debt Estimates Using the Two...Ch. 8 - Prob. 10MECh. 8 - Prob. 11MECh. 8 - Recording Note Receivable Transactions RecRoom...Ch. 8 - Prob. 13MECh. 8 - Determining the Effects of Credit Policy Changes...Ch. 8 - Prob. 15MECh. 8 - (Supplement 8A) Recording Write-Offs and Reporting...Ch. 8 - Recording Bad Debt Expense Estimates and...Ch. 8 - Determining Financial Statement Effects of Bad...Ch. 8 - Prob. 3ECh. 8 - Recording Write-Offs and Recoveries Prior to...Ch. 8 - Prob. 5ECh. 8 - Computing Bad Debt Expense Using Aging of Accounts...Ch. 8 - Computing Bad Debt Expense Using Aging of Accounts...Ch. 8 - Recording and Reporting Allowance for Doubtful...Ch. 8 - Recording and Determining the Effects of Write-Off...Ch. 8 - Recording Note Receivable Transactions, Including...Ch. 8 - Recording Note Receivable Transactions, Including...Ch. 8 - Recording Note Receivable Transactions, Including...Ch. 8 - Using Financial Statement Disclosures to Infer...Ch. 8 - Using Financial Statement Disclosures to Infer Bad...Ch. 8 - Prob. 15ECh. 8 - Analyzing and Interpreting Receivables Turnover...Ch. 8 - (Supplement 8A) Recording Write-Offs and Reporting...Ch. 8 - Recording Accounts Receivable Transactions Using...Ch. 8 - Interpreting Disclosure of Allowance for Doubtful...Ch. 8 - Recording Notes Receivable Transactions Jung ...Ch. 8 - Accounting for Accounts and Notes Receivable...Ch. 8 - Analyzing Allowance for Doubtful Accounts,...Ch. 8 - Recording Accounts Receivable Transactions Using...Ch. 8 - Interpreting Disclosure of Allowance for Doubtful...Ch. 8 - Recording Notes Receivable Transactions CS...Ch. 8 - Accounting for Accounts and Notes Receivable...Ch. 8 - Analyzing Allowance for Doubtful Accounts,...Ch. 8 - Recording Accounts Receivable Transactions Using...Ch. 8 - Prob. 2PBCh. 8 - Prob. 3PBCh. 8 - Accounting for Accounts and Notes Receivable...Ch. 8 - Analyzing Allowance for Doubtful Accounts,...Ch. 8 - Recording and Reporting Credit Sales and Bad Debts...Ch. 8 - Prob. 2COPCh. 8 - Recording Daily and Adjusting Entries Using FIFO...Ch. 8 - Prob. 1SDCCh. 8 - Prob. 2SDCCh. 8 - Ethical Decision Making: A Real-Life Example You...Ch. 8 - Critical Thinking: Analyzing the Impact of Credit...Ch. 8 - Using an Aging Schedule to Estimate Bad Debts and...Ch. 8 - Accounting for Receivables and Uncollectible...
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