Accounts Receivables Paper 4

1

Best Computers believes that its collection costs could be reduced through modification of collection procedures. This action is expected to result in a lengthening of the average collection period from 28 days to 34 days; however, there will be no change in uncollectible accounts. The company’s budgeted credit sales for the coming year are $27,000,000, and short-term interest rates are expected to average 8%. To make the changes in collection procedures cost beneficial, the minimum savings in collection costs (using a 360-day year) for the coming year would have to be






2

Hest Computers believes that its collection costs could be reduced through modification of collection procedures. This action is expected to result in a lengthening of the average collection period from 30 to 35 days; however, there will be no change in uncollectible accounts, or in total credit sales. Furthermore, the variable cost ratio is 60%, the opportunity cost of a longer collection period is assumed to be negligible, the company’s budgeted credit sales for the coming year are $45,000,000, and the required rate of return is 6%. To justify changes in collection procedures, the minimum annual reduction of costs (using a 360-day year and ignoring taxes) must be






3

Clauson, Inc., grants credit terms of 1/15, net 30 and projects gross credit sales for the year of $2,000,000. The credit manager estimates that 40% of customers pay on the 15th day, 40% on the 30th day, and 20% on the 45th day. Assuming uniform sales and a 360-day year, what is the projected amount of overdue receivables?






4

Northville Products is changing its credit terms from net 30 to 2/10, net 30. The least likely effect of this change would be a(n)






5

Snug-fit, a maker of bowling gloves, is investigating the possibility of liberalizing its credit policy. Currently, payment is made on a cash-on-delivery basis. Under a new program, sales would increase by $80,000. The company has a gross profit margin of 40%. The estimated bad debt loss rate on the incremental sales would be 6%. Ignoring the cost of money, what would be the return on sales before taxes for the new sales?






6

A credit manager considering whether to grant trade credit to a new customer is most likely to place primary emphasis on






7

Computer Services is an established firm that sells computer hardware, software, and services. The firm is considering a change in its credit policy. It has been determined that such a change would not change the payment patterns of the current customers. To determine whether such a change would be beneficial, the firm has identified the proposed new credit terms, the expected additional sales, the expected contribution margin on the sales, the expected bad debt losses, and the investment in additional receivables and the period of the investment. What additional information, if any, does the firm require to determine the profitability of the proposed new policy as compared to the current credit policy?






8

Locar Corporation had net sales last year of $18,600,000 (of which 20% were installment sales). It also had an average accounts receivable balance of $1,380,000. Credit terms are 2/10, net 30. Based on a 360-day year, Locar’s average collection period last year was






9

Powell Industries deals with customers throughout the country and is attempting to more efficiently collect its accounts receivable. A major bank has offered to develop and operate a lockbox system for Powell at a cost of $90,000 per year. Powell averages 300 receipts per day at an average of $2,500 each. Its short-term interest cost is 8% per year. Using a 360-day year, what reduction in average collection time would be needed in order to justify the lockbox system?






10

Consider the following factors affecting a company as it is reviewing its trade credit policy.
I. Operating at full capacity.
II. Low cost of borrowing.
III. Opportunity for repeat sales.
IV. Low gross margin per unit.
Which of the above factors would indicate that the company should liberalize its credit policy?






Result

Total Questions:
Correct Answers:
Wrong Answers:
Percentage: