Q2. A company currently has annual sales of Rs. 500,000 and an average collection period of 30 days. It is considering a more liberal credit policy. If the credit period is extended, the company expects sales and bad-debt losses to increase in following manner: Credit policy А Increase in credit period Increase in sale (Rs) Bad debts % of total sales 25,000 1.2 35,000 1.5 40,000 1.8 50,000 ABCDE 10 days 15 30 42 2.2 The selling price per unit is Rs 2. Average cost per unit at the current level of operations is Rs. 1.50 and variable cost per unit is Rs. 1.20. if current bad debt loss is 1% and required rate of return on investment is 20%, which credit policy should be undertaken? Ignore taxes and assume 360 days in a year.

Q2. A company currently has annual sales of Rs. 500,000 and an average collection period of 30 days. It is considering a more liberal credit policy. If the credit period is extended, the company expects sales and bad-debt losses to increase in following manner: Credit policy А Increase in credit period Increase in sale (Rs) Bad debts % of total sales 25,000 1.2 35,000 1.5 40,000 1.8 50,000 ABCDE 10 days 15 30 42 2.2 The selling price per unit is Rs 2. Average cost per unit at the current level of operations is Rs. 1.50 and variable cost per unit is Rs. 1.20. if current bad debt loss is 1% and required rate of return on investment is 20%, which credit policy should be undertaken? Ignore taxes and assume 360 days in a year.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter18: The Management Of Accounts Receivable And Inventories

Section: Chapter Questions

Problem 15P

See similar textbooks

Similar questions

Problem: A company's credit policy is based on terms of net 60, but it expects to average a days sales outstanding in the coming yeat of T dayn on estimated credit sales of $15 million. Its bad debt losses are expected to average 3% of sales Another policy is being considered which involves more strict credit standards. This policy would be based on terms of net 30, an expected das sales outstanding of 34 days, estimated credit sales of $14 million, and a bad debt loss rate of 2% of sales. Its variable cost ratio is 60%, and its cost of borrowing short-term is 5%. If it switches to the new policy, what will be the expected change in interest expense?
Q2. XYZ Company, a retail business, is facing challenges with bad debts and wants to analyze the impact on its financial statements using the allowance method. Here are the relevant figures in Saudi riyals: Total Credit Sales: 800,000 SAR Beginning Allowance for Doubtful Accounts: 10,000 SAR Bad Debts Written Off: 15,000 SAR Ending Accounts Receivable: 120,000 SAR Bad Debts % (Estimated): 3% Question: Calculate the bad debts expense for the period, Determine the net realizable value (NRV) of accounts receivable, Analyze the impact of bad debts on the financial statements, and provide recommendations to manage and reduce bad debts.
Choose the correct letter and provide solution A firm has total annual sales (all credit) of P100,000.00 and accounts receivable of P20,000.00. How rapidly (in how many days) must accounts receivable be collected if management wants to reduce the accounts receivable to P15,000.00? *a. 22.8 daysb. 34.8 daysc. 44.8 daysd. 52.8 dayse. 54.8 days
Choose 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 days
A firm has total annual sales (all credit) of P1,200,000 and accounts receivable of P500,000. How rapidly (in how many days) must accounts receivable be collected if management wants to reduce the accounts receivable to P300,000? choose the letter of the correct answera. 51.3 daysb. 61.3 daysc. 71.3 daysd. 81.3 dayse. 91.3 days
4. KK Co. normally takes 30 days to pay for its average daily credit purchases of P2,000. Its average daily sales are P3,000, and it collects accounts in 25 days. What is its net credit position? (Note that a negative position implies receivables exceed payables.) A. P1,000 B. (P1,000) C. P15,000 D. (P15,000) 5. A firm is offered trade credit terms of 3/15, net 45 days. The firm does not take the discount, and it pays after 67 days. What is the nominal annual cost of not taking the discount? (Assume a 365-day year.) A. 21.71% B. 22.07% C. 22.95% E. 24,52% D. 23.48% 6. GFB Co. buys on terms of 2/15, net 30 days. It does not take discounts, and it typically pays 30 days after the invoice date. Net purchases amount to P730,000 per year. On average, how much "free" trade credit does GFB Co. receive during the year? (Assume a 365-day year.) А. Р30,000 С. Р50,000 E. P70,000 B. P40,000 D. P60,000
PGL Corporation has a credit sale of $ 240,000 in 2018. The company estimates that 9 % of its credit sales will not be collected from customers. The amount of bad debts using the percent of sales method would be O a. $22,500 Ob. $24,800 O c. $16,600 O d. $21,600 4
6. Your firm decides to tighten its credit policy so that customers pay in 30 days rather than 45 days. Assuming no other changes, this action will decrease the firm's: A Trade payables period. B Inventory holding period. C Trade receivables collection period. D None of above.
If a firm had been extending trade credit on a 2/10, net 30 basis, what change would be expected on the balance sheet/statement of financial position of its CUSTOMER if the firm went to a net cash 30 policy? a. Increased receivables b. Increased payables c. Decreased in cash d. Decreased payables
Assume a bank’s review of its historical loan losses has been estimated at 1.33% for its auto loans. The bank currently has gross auto loans of $2,000,000. If the bank determines that the optimal or desired rate (r) for its auto loans is 4.5%, what rate should it charge to compensate for its expected losses?
Why is some trade credit called free while other credit is called costly? If a firm buys on terms of2/10, net 30, pays at the end of the 30th day, and typically shows $300,000 of accounts payableon its balance sheet, would the entire $300,000 be free credit, would it be costly credit, or wouldsome be free and some costly? Explain your answer. No calculations are necessary.
4. KK Co. normally takes 30 days to pay for its average daily credit purchases of P2,000. Its average daily sales are P3,000, and it collects accounts in 25 days. What is its net credit position? (Note that a negative position impliesreceivables exceed payables.) A. P1,000 C. P15,000B. (P1,000) D. (P15,000)