A company plans to tighten its credit policy. The new policy will decrease the average number of days in collection from 75 to 50 days and will reduce... Accounting MCQs | Accounting MCQs

A company plans to tighten its credit policy. The new policy will decrease the average number of days in collection from 75 to 50 days and will reduce the ratio of credit sales to total revenue from 70% to 60%. The company estimates that projected sales will be 5% less if the proposed new credit policy is implemented. If projected sales for the coming year are $50 million, calculate the dollar impact on accounts receivable of this proposed change in credit policy. Assume a 360-day year.

$6,500,000 decrease.
$3,819,445 decrease.
$3,333,334 decrease.
$18,749,778 increase.Show Result

Correct - Your answer is correct.

Wrong - Your answer is wrong.

Detailed Answer

Answer (C) is correct. Projected credit sales for the year under the old credit policy were $35 million ($50,000,000 × 70%). The level of average receivables was calculated as follows: Receivables turnover = Days in year ÷ Average collection period = 360 days ÷ 75 days = 4.8 times per year Average receivables = Net credit sales ÷ Receivables turnover = $35,000,000 ÷ 4.8 times = $7,291,667 Under the new policy, total sales will be $47.5 million ($50,000,000 × 95%), and credit sales will be $28.5 million ($47,500,000 × 60%). The new level of average receivables is calculated as follows: Receivables turnover = Days in year ÷ Average collection period = 360 days ÷ 50 days = 7.2 times per year Average receivables = Net credit sales ÷ Receivables turnover = $28,500,000 ÷ 7.2 times = $3,958,333
The average receivables balance will therefore be reduced by $3,333,334 ($7,291,667 – $3,958,333 .