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Chapter 3: Q6DQ (page 219)

Explain why the bad debt percentage or any other similar credit-control percentage is not the ultimate measure of success in the management of accounts receivable. What is the key consideration?

Short Answer

Expert verified

The return generated from the investment in accounts receivables is considered to determine the success of accounts receivables management.

Step by step solution

01

Meaning of accounts receivables 

The accounts receivables refer to any amount receivables by the organization when they sell its goods on a credit basis to its customers. These are current assets for the organization and are collected within a few months’ time.

02

The key consideration in accounts receivables management 

The rate of return generated from the investment made in the accounts receivables is an important consideration when justifying the investment. The management does not consider the bad debt and credit control percentages when determining the return from accounts receivables investment.

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Most popular questions from this chapter

Henderson Office Supply is considering a more liberal credit policy to increase sales, but expects that 9 percent of the new accounts will be uncollectible. Collection costs are 6 percent of new sales, production and selling costs are 74 percent, and accounts receivable turnover is four times. Assume income taxes of 20 percent and an increase in sales of $65,000. No other asset build-up will be required to service the new accounts.

e. Given the income determined in part b and the investment determined in part d, should Henderson extend more liberal credit terms?

What are the advantages of commercial paper in comparison with bank borrowing at the prime rate? What is a disadvantage?

Oral Roberts Dental Supplies has annual sales of \(5,200,000. Ninety percent are on credit. The firm has \)559,000 in accounts receivable. Compute the value of the average collection period.

“The most appropriate financing pattern would be one in which asset build-up and length of financing terms are perfectly matched.” Discuss the difficulty involved in achieving this financing pattern.

Antonio Banderos & Scarves make headwear that is very popular in the fall-winter season. Units sold are anticipated as follows:

October

1,250

November

2,250

December

4,500

January

3,500

Total units

11,500

If seasonal production is used, it is assumed that inventory will directly match sales for each month and there will be no inventory build-up.

However, Antonio decides to go with level production to avoid being out of merchandise. He will produce the 11,500 items over four months at a level of 2,875 per month.

a. What is the ending inventory at the end of each month? Compare the units sales to the units produced and keep a running total.

b. If the inventory costs $8 per unit and will be financed at the bank at a cost of 12 percent, what is the monthly financing cost and the total for the four months? (Use 1 percent or the monthly rate.)
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