An entity sells to retail stores on credit terms of 2/10 net 30. Daily sales average 150 units at a price of US $300 each. Assuming that all sales are on credit and 60% of customers take the discount and pay on day 10 while the rest of the customers pay on day 30, what is the amount of the entity's accounts receivable?
Answer(s): D
The entity has daily sales of US $45,000 consisting of 150 units at US $300 each. For 30 days, sales total US $1.350.000. Forty percent of these sales. or US $540,000, will be uncollected because customers do not take their discounts. The remaining 60%. or US $810,000. will be paid within the discount pen 1. However, by the end of 30 days. only 213 of the US $810,000 will be collected because the sales from days 21 through 30 are still within the discount period. Therefore, an additional US $270,000 $810,000 - $5...I0, Ori0) will still be uncollected after the 30th day, but will be subject to a discount. In total, the average retail balance is US $810,000. consisting of US $540,000 on which no discount will be taken and US '1.270.000 that will be paid within the discount period.
A change in credit policy has caused an increase in sales, an increase in discounts taken, a decrease in the amount of bad debts, and a decrease in the investment in accounts receivable.Based upon this information, the entity's:
Answer(s): A
An increase in discounts taken accompanied by declines in receivables balances and doubtful accounts all indicate that collections on the increased sales have been accelerated. Accordingly, the average collection period must have declined. The average collection period is a ratio calculated by dividing the number of days in a year 365) by the receivable turnover Thus, the higher the turnover, the shorter the average collection period The turnover increases when either sales the numerator) increase, or receivables the denominator) decrease Accomplishing both higher sales and a lower receivables increases the turnover and results in a shorter collection on period.
An entity 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 entity estimates that projected sales will be 5% less if the proposed new credit policy is implemented. If projected sales for the coming year are US $50 million, calculate the dollar impact on accounts receivable of this proposed change in credit policy. Assume a 360-day year.
Answer(s): C
If sales are US $50 million, 70% of which are on credit, total credit sales will be US $35 million. The receivables turnover equals 4.8 times per year 360 days - 75-day collection period). Receivables turnover equals net credit sales divided by average receivables. Accordingly, average receivables equal US $7,291.667 $35,000,000 - 4.8). Under the new policy, sales will be US $47.5 million 95% x $50,000,000), and credit sales will be US $28.5 million 60% x $47,500,000). The collection period will be reduced to 50 days, resulting in a turnover of 7.2 times per year 360 - 50). The average receivables balance will therefore be US $3,958,333 ($28,500,000 - 7.2), a reduction of US $3,333,334 $7,291.667 - $3,958,333).
Which of the following represents an entity's average gross receivables balance?I). Days' sales in receivables x accounts receivable turnover.II). Average daily sales x average collection period.III). Net sales/average gross receivables.
An entity's average gross receivables balance can be calculated by multiplying average daily sales by the average collection period days' sales outstanding). Alternatively, annual credit sales can be divided by the accounts-receivable turnover net credit sales/average accounts receivable) to obtain the average balance in receivables.
The high cost of short-term financing has recently caused an entity to reevaluate the terms of credit it extends to its customers. The current policy is 1/10, net 60. If customers can borrow at the prime rate, at what prime rate must the entity change its terms of credit in order to avoid an undesirable extension in its collection of receivables?
Terms of 1/10, net 60 mean that a buyer can save 1% of the purchase price by paying 50 days early. In essence, not taking the discount results in the buyer's borrowing 99% of the in price for 50 days at a total interest charge of 1% of the invoice price. Because a year has 7.3 50-day per periods 365 50), the credit terms 1/10, net 60 yield an effective annualized interest charge of approximately 7.371 [(I% 99%) 7.3]. If the prime rate were higher than 7.37%, the buyer would prefer to borrow from the vendor i.e., not pay within the discount period) rather than from a bank. Consequently, an 8% prime rate could cause the vendor's receivables to increase. An entity sells 10,000 skateboards a year at US $66 each. All sales are on credit, with terms of 3/10. net 30, which means three percent discount if percent it is made within 10 days; otherwise full payment is due at the end of 30 days. One half of the customers are expected to take advantage of the discount and pay on day 10. The other half are expected to pay on day 30. Sales are ,, ict id to be uniform throughout the year for both types of customers.
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