Detailed Answer
(c) The requirement is to calculate impact of this
change in policy on accounts receivable. Under the existing policy,
sales are equal to $50,000,000, 70% of which are on credit.
Therefore, the average accounts receivable balance is equal to
$7,291,667 [($35,000,000 credit sales ÷ 360 days) × 75 days].
Under the new policy credit sales are estimated to be
$28,500,000 [($50,000,000 × 95%) × 60%]. Accordingly, the
average accounts receivable balance under the new policy is estimated
to be $3,958,333 [($28,500,000 credit sales ÷ 360) × 50
days]. Answer (c) is correct because the change in accounts
receivable balance is estimated to be a decrease of $3,333,334
($7,291,667 – $3,958,333).