cHAPTER

17
RECEIVABLES MANAGEMENT 870

The
Conceptof Trade Recelvables
the
purpose of making asale
Fr
receivablesspring out of
the need to sell a creditfacllity business
oposition
Trade i sto generate sales without offering merchandise.
Of course,, an excellent
to customers. However, this
theoretically sOund but is
nceptis impractically sustainable.
youhaveis a right
All
discriminating nnature of competition has made it as Replace you
established practice to offee goods
The temsto customers. Once credit sales are made, an already withdrawn with the
right to collect
cedit warehouse and yet no cash is inventory is c
the received. All you have is a"right to collect money money
fom customers. Anid that precious right is inthe
based on a promise that yyou will be paidtrust
from the whole point of selling your i[ based on your
ture. Ergo, merchandise credit i
on
toCUstormers.
an economic
Youhelp
your customers by entrusting a merchandisetothem. By entrusting
still do ot have the
resource. This is all for making a sale. And when you makea sale,andyou
an anemic statemeent
money. AIlyou have is
an impressive statement of profit or loss Understanding the
stubbornly uncollected.
#eash flows. That is, if you let your receivables to the study of the credit and collection cycle
neivables collection procesS WOuld tak us
cycle).
fthe receivable management
customers.
depends to a large extent on the quality ofup and used redit cycle
The collectibility of accounts receivables credit policies set
depends onthe standards of credit cycle which inçludes
And the quality of customers policies are integral part of the entire
by an organization. standards, credit evaluation and credit approval and credit system
Credit
among others credit presentation of the çredit cycle.
8ssessment. Below is a conceptual

Fig. 17.1 Credit Cycle

Credit Standards

Credit policies
Credit system
assessmen

Credit evaluation
Credit approval
 CHAPTER 17

871
RECEIVABLES MANAGEMENT
CHAPTER 17
,collection hasits own system cycle. It starts from the time the merchandise Credf
RECEVABLES MANAGEMENT 872
Collection cycle On thebeen
has otherdelivered
hand, to customers. Effective billing and collections systems should be In
place and efficiently administered. Collection policies should be established in line with the
DÍscount rate
poliey
and age of accounts recelvables. Belov
organization's targeted receivable portfoliocollection Dlscount rate high
low
Conceptual presentation of the receBvable
cycle.
piscount time
fester
Discount tlme short (strlc)
long (ax)
dower
Fig. 17.2 Collection Cycle foner toe
Credit perlod
short (strict) ower decrene
Delivery of merchandise
Credit perod long (lax) fater Indeae hores
Credit capP. high (strict) owes ecreone onges
Credit cap low (lax) faser incese dectease shors
Credit class decresse long
low rlsk (strict) Incee
fater Inene
Biling policies
Collection Credit class
high risk (lax) hones
longer
Remlnders: sower indecrease
crease shorer
AR Turnover : Net decreose longer
Collectlon Period : 365 Credit/Sales / Ave. A/R
days A/R tumover Balance
Aging of Collection policies
Acoounts
receivable Effeçtive Discount Rate
Trade discounts or credit
Receivable portfolio aecounts earlier. Thts discounts
that could be dertved bywinwin situation
are given to encourage
between the seller and thecredit customers to pay their
analysis the buyer in terms of buyer speaks of thebenefts
on the part of the seller for the reduction in the amountto be paid and the benefit
earnings. The bat is, the higheropportunity
the
to use the money earty to
generate addiüonal
The credit and collection functions are the responsibilities of the treasurer. eten eariler date. However, the dlscount rate, the more attrctke for
cost-benefit trade-off should be considered,thethatbuyer to
cost of offering the discount rate should is, the
be compared with the benefit of using the money.
Credit management The discount rate adjusted on an annual basis is known as the effective
discount rate. tis
computed as follows:
SC's of oredt Credit management strategically defines the quality of accounts receivable collections. Credit
Character, and collection have a direct relationship. If credit standards are high, the rate of collection
Capacity, Capital, is expected to be high, end vice-versa. Credit processes precede collection activities. To Effectíve discount rate Discountrate Davsina year
Collatersl, hold the receivable balance at bay and the rate of uncollectiblity. at the best minimum, the 100 %-discOunt ráte Remalning predit time
Conditions simple ldea is: "do it right from the very first time!" by setting the
applicable credti standards. Effective discount ratePeriodic discount ate x No. of non-free discount time periods
Generaly, t is a choiceof offering and implementing a set of stiff credtcriteria to have a high
collection rate or a set of lax credit criterle resutting to high amount of bad debrts, collection
costs, and recelvables. However, creative managers can still develop a mix of models in Ine periodic discount rate is net financing costs divided by net proceeds. Discount rate relates
managing their recevables and collection to optimize sales and collections. *100%- discount rate' refers to the net proceeds.
O the financing costs and the exoression
days from
There are geveral variables of credit management such as discount rate, discount time, discount time' which is the number of
period, credit cap, credit class, and credit assessment. The credit credit Rremaining credit time is the non-free of the entire codit period. Credittperdod refers
management variabies totheend
the datethe discounttperiod endsupcustomers. slows down collection
affect colections, recelvable balence and recelvable turnover as shown on Along creditperiod
customers.
the following9 paya. to the entire credit days gratedto receipts of moneyfrom
whileta short credit period quickens the
 CHAPTER17
RECEIVABLES MANAGEMENT
873 CHAPTER 17
The number of non-free discount time
periods" or "discount time turnover (e., days in a
in a year where the seller col yearr
ifthe
recelvable
discount
irne is
turnover is short,
RECEVALES MAHAGEMENT
delayed,periordecOlceval
is higher, and the ls leciocoln lecon ctereó, 874
Efectve discouni / remainingcredit time) reoresents the number of times collectioni
jslong,and
rate (EDR, the moneythat he received at an earlier date. the collection
is e balance tends eiodato tecrbe
lower,
computatuons
shoened. belonc reduc,
is
time also engthened.
term of 2/10, n/30. The analysis should be as
Let us appBy the formula. Assume a credit
follows: A
in
change discount baloon, recenbehe ascN
tumover ets
2%
Credit cap and credit block changesthe effectve ocou re.
10 -’ 30 Credit cap (or credit limit)
(free discount time) non-free discount time merchandise tems)
set orreers to the tation of
capability to meet trade imposed bymithe creit ine in ems
(The 2% discountrte covers the 20 days non-free discount time, because the
the mony peid to him in advance in the next 20 days (.e., 11to 30 days) to
seller cap n
earn at least he credit cap is. paymets. The higherselerthe tocreditaoiven
rsk cust
of aomee
amount (or en
dependingg on his
equivalent value of discount he has granted to cUstomers. The EDR 0s Computed as:
Say, a given customerris
astomes, he lowes e
365 days limit is reached, allowed
deliveries only
to the saidto be extended credit up to
EDR
23
100 %-2% 20 days account, fuly or partially. customer wil be stoppedP50,unless000. he When that credit
setdes frst his
36725 Credit block is the policy of
become past due. New non-delwillbe
deliveries ivery ofmademerchandiseto Customers once thei accounts
Current. once an account has been paid or becomes
This means that if the seller gives a 2% discount in ten days, he has an extra 20 days to use
the money and generate earnings. Ina year, the effective discount rate is 36.73%. Therefore Credit class
ifa seller cannot use the money collected in advance to generate annual earnings reater
than or equal to 36.73%, the discount should better not be offered to customers.
Credit cass pertains to the group of customers to whom
On the other hand, if the buyer is unable to use the money he has to paythe seller and generate ustomers may be classihed according to incOme level, merchandise shal be deivered
place of residence, gender, age,
eamingsoreater than 36.73 %, or that he can borrow money at an interest rate. lower than ceographical location, civil status, and other areas of social demographics Creit limits
the 36.73% to pey his debt within the discount period, he should use the aternative source and other credit terms are determined for each credit cdass. Sometimes, a product is not
of fund from borrowing pay within the discount period, avail of the discount, and profit along technically offered in a given credit dass may be because of avery igh cr¿¡it risk or the
the way. Asummary is given below. product is not really intended for them.
Fhe THEN Sample Problem 17.1. Change in Credit Pollcy Change in
Porty credit poli

Sr EDR <ROl of mongy collected offer the trade discount

Robert Company is considerlng to change its credit policy from "2/10, nv30 to "2/n5, n/45.
EDR > RO1 of monecy collected do not offer the trade discount P48 million, or an increase of 202% from last
This change would push the 20CY sales to reach credit. Eighty percent of credit customers
year's. Ninety percent of total sales would be on
Buyer EDR> COt of money (eg, interest rate) avel of the trade diecount of the discount. Accounts receivable at the end of year is estimated at
Buyer EDR< Cost of money Ignore the trade dBscount are expected to avail be maintained at 75%.
15% of sales. Variable costs ratio shal
EDR < RO if money s ued vll of the trade discount increase by 10% of the
Buyor
Duyr EDR> RO monsy ls únd lgnore the trde diecount, bonac s chanaina the credit terms, colection costs would from 1% to 275% of credit
n relation to are expected to incresse
Doubtul accounts at 12%.
uCremental sales.
retum on a gven investment is detemined
The diecount time ofered by the business is afected by the practice in the industry Sues. The effective rate of
compettion, qunlityof customer, operating cycle, financlal cepablty of the sello, end long change its creditpolicy
in 20CY?
term objectives of the organization. Discount time is aleo in elation wth the discout Required: Should Robert Company c
rate. If the decount time is short, the dlscount rate goes higher; and, it the discount thme s
long, the discount ls lowered.
 RECEIVA8LES MANAGEMENT
875
CHAPTER17 CHAPTER17

Solutlons/Discussions:
Based on the data provided, the relevant cost analysis shall be as follows:
receivable
balance.
increased savings A
RECENA8LES MANAGEMENT
possible income fromÇange trom alaxn creßn 876

margin redueeasredetoucd leoadcst ountcolescion costsol, otcyud1o, 1 tid cet clo

Before ne. (Pec)
On
contribution fr om
P40,000,000 P 48,000,000
P8000,000 sales ontecrte bectlance wit ccounts expense, and
Sales (P48 million /120%)
Credit sales (90% of sales) 36,000,000
30,000,000
43,200,000
36,000,000
7,200,000
6,000,000 collection management acoount astúctes rÐaMcomesçonâng loes
Variable costs (75% of sales)
Contribution margin
polc
Operationally.
(Sales - Variable costs)
Acoounts receivable-end
10,000,000 12,000,000 2,000,000
redit customers.
maintainedto
collectComplion etmae nandagement starts from the
(15% of sales) ensure eficient reibasiablse ofrecords and dae the
an
a collecion. coBlncnbosorainndg mesrchandis shouid
Doubtful accounts expense interrelated processes to is sold to
(1% x P36,000,000)
(1.75% x P43,200,000)
6,000,000 7,200,000 1,200,000 balance, receivable compl ete
turnover, and colecion grce. Ther coldoanent ecion s policies
be
Increase in collection costs 360,000 756,000 396,000 colecion peiod are eifectnets to accountts receivable are
(10% x P8,000,000)
Sales discount (Credit sales x80%x 2%) 576,000 691,200
800,000
115,200
ctlon preerted poge
Sem
The relevant costs analysis shall be: Callection TUmover
Incremental contribution margin faster
Increase in gross sales P8000,000
slower
Increase in sales discount 115200)
Increase in net sales 7,884,800
Maintain an efficient billing system!
x CMRatio 25% P 1,971,200 Accurate, prompt, and servce ofented blingsystems
Less: Incremental costs: and efficlency of collections. qreaty contribute to the efectiveness
Collection costs P800,000 Rill completeness. Statement of bils
Doubtful accounts 396,000
Information about the credit sakes and sent to customers should contain all the
payment to be made. Bills do not only relevant
Opportunity costs on the increased balance of reminders that customers have an to the seling company but also sere saseve as
scoounts receivable (P1,200,000 x12% x75%) 108.000 of information on the accurscy ofobligation
goods sold, unit prices, imvoice prices, credit source
1304,000 date of delivery. Adjustments made caused by merchandise returns are terns, and
Incremental profit from the change in credit policy 667.200 sometines shown
in the billing statement send message of accuracy and openness.
to a
Given the analysis shown above,it is more profitable for the company to change the credit
pollcy because thls option is expected to generate an incremental profit of P667200. Ermor-froe statement of bls. An emor foud by the debtor in the bling statement would be
areason for him not to pay unless comections are made. This would unreasonably delay
The incremental cotribution margin represents the benefits derived from the decision collections and promote inefficiencles.
tomodify the credit terms. The return on investmet is considered in the analysis as an
of the sellers
Snd billson time. Promptness in sending the bills sends astrong messagethe
opportunity cost and is added to the incremental çosts.t is an opportunity cost because This makes debtor not
adifferentcourse of action or decilon hàs been tàken. Dpportunity cost is an Implict qualty of operations and a rsove to make collectons on time.
economic costs important in the analysis. cholcetovllof uny promotional discounts and
only informmed promptly but is also gven theoccasionally contained or inserted in the billing
De infomed of other releyant infonaionupcoming products changes in the delivery time
The overriding model of analyzing whether achange in credit policy is acceptable or not PecKage (e.g., new promotonal package bllsisagentle reminder to debtors that they
have to
still relatestothe basic business citerion of cost-benefit analysls. Achange from System, etc.). Timely delvery of
promptly.
credit policy to a lax credit policy would increase contribution margin and strict make true to their cOmmitment of peyng thelr dues
costs of collection, doubtful acoounts, and increase the
opoortunity costs on increased accout
 CHAPTER17
877

Collect...just collect it!

RECEIVABLES MANAGEMENT
CHAPTER 17
collection period
RECEVABES MANAGENMENT 878
Receivable
turnover (360 45tas
Frequencyof colection follow-up. Bals are normaly sent beforethe discOunt period elanso collection period) daysl
Bills are sent again before the end of the credit period. If receipts are not made within th Net sales 3tmes 15 dars
credit period, a notice of collection of past due accounts should be set. Friendly, tact and
AccOUnts recevable balance 12times
frequent notices of colections through calis, other electronic means or personal visitation
are tested practices in making effectve collections.
(Net sales/Recevable turnoven
(P30 million /8 days)
P30 0 0 o P300000 4tmes

Visibility of colection personnel. Companies whose business are related to credit retailing (P30 million / 12 days)
engage the services of colleciors to move around, vist, and make collections. These collectore jncrease in
3150,000
are part of the treasury department and should n¡t be a member of the sales departme collection costs((30% xP30,000D00) 2.500,0900
Maintaining an effectve field collection personnel group is also asuccessful technique most 1250,000)
commonly applied by smalland medium size distribution and fnancing companies. Income from the 90,000
(P1,250,000 xrel12%)eased balance of acCCOunts 90,D00
Bectronic fund transter and concentration barnking. The advantages of electronic technoloay
have contributed inmensely in the banking sector. Funds are now transferred electronicaly
LesS: Increase in
Net advatage collection costs receiPI50,vabl0e00 (Benefit)
of new collection pohc
from one location to anothes, one account to another, in seconds. Debtors can now pay on
time and avail of the trade discounts less the hassles of catching up the mail and ushina for wie a simple
90000 (Costs)
P6000 (Net beneft)
check deliveries. Banks, upon proper authorizations, can readily transfer account balances analysis ofof cost-benefit
from one account number to another without regard to geographical dispersion.
policy isthe amount relationship. The
provide at 12%. This income that the released beneft of changing the
oolicy (e.g., increase in collectioncompared with theamount of account
woud be collectcould
ion
nCremental costs of using the new
receivable
Sample Problem 17.2. Change in Colection Policy costs).
Magical Sam Corporation is studying a proposed collection system that will decrease The rormputation of
collection period from 45 days to 30 days. To do this, administrative costs in relation to receivable tutnover ib derved fromthe fornua
collection activities are expected to increase by 30% of net sales, which is projected to remain Collection perlod
at P30,000,000. The effectve rate of return prøvailing in the market with the same type of 365 days Receivable tunover
investrment nsk is 12%.
Change in Therefore
Cecin po Should Golden Corporation institute the change in the collection system? SRecelvabletumover 365 days /Collection period
The formula usedin computing the accounts (eceivable balance is derved below
Solutions/Dlecussions:
Receirable turmover Net iredit sales /Arerage accouts ecei
The relevant data provded above are presented using the before-after analysis" as
shown on the net page. Therefore
Accounts ecevable balance Net eredil sales /Recevable tunover

Receivable portfolio analysis

soread)refers to the strategy ofspreadingivestments
Keceivable portfolio (.e. "receivable
customer base. It gives an impression of whether the
defined management
Inreceivables over a its receivable policiesand whetherthe
anagement is strictor lax in imoosigreceivable investments.
is conservative or aggressivein its
customer, group, customer
customer
tracked down per
Receivables should also be
879 RECEIVABLES MANAGEMENT
CHAPTER17 CHAPTER17

receivable age, and customer balances., This is done in relation with

up the collection of receivables.
the
egoal of speeding strict, collection
WOud befaster and
smaller.
RECENABLES MANASEMENT
Customers are analyzed based on their historical attitude of meeting trade obligations. Pas
to be
implementation
to increase. Coarenvlaex,rseyc,oleciotnhe creiwoudbemoet andas ucroedle,ctiandon the
it 880

experiences are relevantt guides tothefuture. If inthe past, acustomer has ahistory of paying
trade obligations long after the credit period is due and after spending material colectin
Aging of.accounts
slower, and thnoie reccesevadandle ebalthe£nance would tend
costs, then the same customer is expected to do the same in the future, assuming all thinns
are under normal conditions. Customers are also classified per group for customer-relatione receivables receraole balancecoespondi ng
would tend
efficacy and standardization of approaches and technques. Aging of accounts
outstanding. It has
receivfoalbolewisngclas thes the accounts
the
down receivable adhvartages.
Accounts receivabl are to be aged in relation with the credit period. An account which is not
yet due for collection is classified as "current account". An account that is still outstandino It tracks
b
aOcording to their
number of days
even after the credit period is called as past due account'. It could be classified further as
"1-30 days past due "31-60 days past due, "61-90 days past due', "91-120 days past due'
It servesas
either Current
an
analysisosheetbalancesto stuy
.
accountwhich past due acCOUntrece.ivable baances to
"120-180 days past due", "181-360 days past due", and "more than 360 days past due'. It gives an idea of
supplemental
analysis ofaccount
thelongs past"movi
are
ng and
accoring their "age as
To illustrate the effects of receivable portfolio, let us asSume two companies with the credit It is areasonable which are
terms 2/10, n/30, have the following receivable spread on October 31, 20CY: technique of estimatedduedoubotacoountul s. "not moving by doing a
Sample Problem 17.3. acoourts expense.
Company A CompanyB
Let us assume the data of
Rechabl e Portolo Analyis
collectibility rate of the eachcompanles Aand Bo
Account group Amount Spread Amount Spread
Current account P6,000,000 75.00 % P 2,000,000 25.00 % group are as follows:Bon page 879, and further SSUme tht the
Past due accounts
1- 30 days 1,000,000 12.50 3,500,000 43.75 AcDOuntGroup
31- 60 days 500,000 6.25 1,000,000 12.50
61- 90 days 300,000 3.75 500,000 6.25
91- 120 days 100,000 1.25 400,000 5.00 Current account 99%
121-180 days 50,000 0.62 300,000 3.75
Past due accounts
181-360 days 30,000 0.38 200,000 2.50
more than 360 days 20900 0.25 100.000 1.25 01-30 deys 97
91-120 days 90%
Total account receivables PR000.000 100.00 9 PR000.000 100.009 31 -60 days 95 121180 days
The two companies invested the same amount in account receivables. However, the gap in 61-90 days 93 181-360 dys 70

their balances is materially different. Company Ahas 75% of its accounts on current status more than 360 days 50
and the remaining 25% is past due. Company Bhas acompletely reverse receivable spread, itis also determined that of the account oroup "more than 360 days' there are cortaln acooute
25% of its accounts are current while 75% are past due accounts. Under normal conditions,
we would expect Company Ato have a faster and more reliable cash streams than that that were approved to be wrten off amounting to P5,000 for Company Aand PAO,000
of Company B. Current accounts tend to be more collectible thereby resulting to a ower Company B. The aging was made on October 31, 20CY.
occurrence of doubtful accounts. The longer the accounts become past due, the higher the for companies Aand Bwould pe
rate of uncollectibility and the greater the collection costs would be. Based on the data, the Aoing of Accounts Recelvable
shown on the followingpage:
Collection costs include the amount spent on man hours lost, machine hours Used,
telecommunications, gas and oil, supplies, opportunity lost on the hours used, and the
opportunity costs of the money tied up in the receivables which could have been used to
generate earnings in other activities (e.g, ROl on acoount receivable).
The data above would also lead us in evaluating the credit and collection policies of an
orgatization. if the credit and collection policies and their implementation thereof are
 CHAPTER17

881
RECEIVABLES MANAGEMENT
CHAPTER 17 RECEIVABLES MANAGEMENT 882

Company
Aoing of Accounts Receivable
October 31, 20CY
Company B
Aging of Accounts Receivable
October 31, 20CY
Revenue-
Receipt sales
of
Receipt Cycke
Sale of rchendee
order
DelInspect
iveryiotnime merchandise and preparaion for
Doubi of
Anount Actful Doubt
P 60,000 Current ccount P2,000,000
Rate Acoourt
Expences Customers' acknowedament of delivery
merchandise receved
P6.000,000 1
Curent account P 20.000
Past due coounts:
Past due ccouts
1.000.000 3 30,000 01-30 days 3.500.000 Perdodlc eccount bility
AccOuntablity of
01- 30 days
31- 60 days 1,000,000
105.000 records and
Preparation of sales reports entries
31- 60 deys
S00.000 5 25,000 5
50,000 Schedule of officialI
Recordlng oi sles
300,009 24,000 61-90 days 500.000 receipts issued Delivery receipts o on-ine entry
61- 90 days
40,000 Schedule of. subsidiary
account receivables Supplemental notes
91-120 days
100.000 10 10,000 91-120 days 400,000
A0.000 Account receivable control
121-180 days 50,000 20 10,000 121-180 days 300,000 20 Aging of account receivablebalance
9.000 181-360 days 200,000
60,000
30,000 30 30
181-360 days
50 7500 more than 360 days 60.000 50
60.000
more than 360 days 15000
PZ960.000 30.000
SendingRecoivina collectlons
P7905000 P1Z5500 Total A/Rec
Total A/Rec
PAO5000 of biling
The accounts to be written off amounting to P5,000 and P40,000 for companies Aand B. Sending of bilingstatement
resDectivehy, are deducted from the past due accounts with "more than 360 days* groun h Issuance of officialstatement
SUch, theremaining balances offthe past due account with more than 360 day grouping are Receiving collectionsreceipt
P15 000 for Company A(i.e., P20,000 - P5,000) and P60,000 for Company Bi.e.. P100 000
- P40,000). Qased on the operang process of
f internal controls, receivables and keeoing in mind the cardinal
the tollowing specific
Since Company Bhas more accounts spread over the "past due abcounts" classification he developed: internal controls for principles
doubtful accounts expense is greater than of Company A. To reduce costs of uncollectihle
revenuerecelipt cycle are
accounts and collections costs, it is advisable for an organization to maintain an optimum Functional responsibilities must be segregated where top
mu of recetvable spread to minimize costs and maximize return on receivables. sale of aproduct or product line, the markting management authorzzes the
makes the delivery, the accounting departmentdepartment promotes, the sales depertment
does the recording, the cash
Accounts receivable to be writen offare to be identified, analyzed, reported, and recommended receves collections, and the auditing department chects the transactions. department
by the collection department under the supervision of the Treasurer. Sales order slip, delivery receipts, official
pre-numbered and multi-copied. receipts, and biling statements should be
Deliveries of merchandise to customers shoukd be supported bya
Internal control for receivables- the "revenue-receipt cycle" ship the goods (e.g, sales delivery slip). witten authorty to
Proper documentation of merchandise shipment should be ensured to
There are receivables internal control principles' to be observed to protect the amount of and accountablity. assure accuracy
investment in receivables, Afirm should provide an aCcurate and reliable accounting report on Merchandise should be insured, especialy when in transit.
receivables, promote operational efficiencies on credit and collection systems, and encourage Delivery receipts should be signed by customers.
adhere e to prescribed managerial policies, To appreciate thèse control systems, let us Efficient and effective biling system must be in place.
revisit tne operating process of the revènue-receipt cycle.
Sales reports should be prepared regularly.
Daily cash reports should always be made.
Account receivable subsidiary ledgers should be periodicaly reviewed and totaled.
ReceByable confimation letter should be regularty sent to customers.
Account receivable should be regularty aged and analyzed.
Accounts should be writen-offafter exhausting all possible collection efforts and
possibilities. Accounts receivatble ledges should always be updated.
 RECEIVABLES MANAGEMENT
CHAPTER 17 CHAPTER17
RECEIVABLES MANAGEMENT BA4
STRAIGHT PROBLEMS
Cost of eglectlon efforts.
collectlon department TheDream Corporation
has P12 spenda P220,00 arnum on ts
1. Change in credit polBcy An aggressive credit manager has taken
Corporation. Cumenty,sales are about P21. 6 milion ayear. The credit over collectlon perlodls 25 company
months, and mitlion in credit sates, ts aveage
Salvation company believesthat tf it were to the percentage
that by establishing credit terms of 2/10, net 30, h can reduce the
from 60 days to 20 days, on aversge. The credit manager expects that
tmanager
collectionbeleves double its
of bad debts lossis 4percent. The
theaverage collection period to 2 months and collecton personne, #could bring down
period
chedit customers will take advantage of the discount and that al of 80% of the total costIff P180,000,,bringing total bad debt osses to 3 percent The added
expendiworthwhile
tures if the
to P400,000
from the receivables can be invested at 15 percent. Moreover, the the tunds eceived Required: Is the incteased effort annualy
company rexpect
to reduce its collection costs by P90,000a year on this new credit policy
s
percent? If It is 10 percent? opportunity cost of funds is 20

Required Using a 360day year, determine the following: Cost ofcredit analysis.
1. Receivables turnovers before and after the change in the credit policies Layag Corpotation makes wIndand dcurrent gauges tor pleasure
boats. The gaugesareesold
2 Average receivable balances before and after the change in the credit pol yee is P50. The company throughout the
has an averagecountry
sales
to boat dealers, and the avere ordet
of P25 milion a yeat. The
3. Net advantage (disadvantage) of the new credit policy. sellsto registered dealers without a
all compeny
credit
the average collection period is 60 days, whichisanalysis. as satisfactory. Davd Aga,
Terms are net 45 days, ad
2. Change in collection policy. The Abraham Company is planning to increase ite.. Vlce-President for Finance,is now regarded
of collection expenditures from the urrent P250,000 to P400,000, on credit enl uneasy about the increasing number of bad debt
tacces on new orders. With credit ratings from local and reaional credit
P24 million, This move is expected to accelerate payments and increase turm agencies,
receivables from 8 to 12 times and cut bad debts from two percent to one ner feels he WOuld be able to classify new orders into one of three risk categornes. Past
credit sales. The opportunity cost of funds is 12 percent. The company uses a 360d experiences show the following
year in financial planning and controlling. Order category
Low risk Medium risk High risk
Required: Calculate the following: Bad debt 3% 7% 24%
1. Receivable turnovers before and after the change in the collection policy. Percent of category orders to total orders 30% 50% 20%
2. Average receivable balance before and after the change in collection poley
3. Net advantage (disadvantage) of the new collection policy.
The cost of producing and shipping the gauges and of carrying the receivables is 78
percent of sales. The cost of obtaining credit-rating information and of evaluating it is
3. Change in credit policy. The Manila Company presently gives terms of net 30 dave p4 per order. Surprisingly, these does not appear to be any association between the
t has P60 milion in sales, and its average collection period is 45 days. To stimuiate risk categories is around 60 days.
demand, the company may give terms of net 60 days. If this policy is implemented
sales are expected to increase by 15%. After the change, average collection period is Required: Based on this information, should the company obtain credit information on
expected to be at 75 days, with no difference in payment habits between old and new new orders instead of selling to all new accounts without credit analysis?
customers. Variable costs are PO.80 for every P1.00 of sales, and the company's required
rate of return on investment in receivables is 20%. The company expects to spend an 7. Eifective discount rate. Determine the equivalent rate of discount that wouid be lost
incremental collection cost of P200,000 to undertake this change in credit policy. The if a company failed to take the cash discount under each of the following trade terms:
prevailing average market rate of investments is 15% per annum. Customers' defauts
in payments are expected to reach 3% on total sales as compared from aminimal 1.5% 1. 1/15, net 30. 5 2/30, net 60.
based on the present credit terms. 2. 1/20, net 30. 6 3/10, net 60.
Required: Should the company extend its credit period? (Assume a 360-day year) 3. 2/10, net 30. 7. 3/10, net 30.
4. 2/10, net 60.
4. Change in credit policy. Silverstone Corporation has a 12% opportunity cost of funds
itself with excess manufacturing
and currenty sells on terms of net 10, EOM. This means that goods shipped before the 8. Change in credit policy. The Height Corporation finds the market over the past several
end of the month must be paid for by the tenth of the following month. The firm has of
capacity. The company has lost aportion of its sharemore
sales of P10 mition 'a year, which are 80 percent on credit and spread evenly over the part, may be due to Height having a conservative credit policy than
years. This, in
year. Currenty, the average collection period is 60 days. iIf Silverstone offered terms of 0s common in the industry.
2/10, net 30, sixty percent of thecustomers would take the discount; and the collection
period woud bereduced to 40days.
Required Sthoutd Silverstone change its terms from net/10, EOM to 2/10, net 302
885 RECEIVABLES MANAGEMENT CHAPTER17

Height Cor.
CHAPTER 17 RECEIVABLES MANAsEMENT 886
Required:
Terns 2/10, net/30 Industne60
ry Estimatethe accounts
Credit granted as percent of
applicants by credit class
2/10, Assumingtotal; ssets at recevable at
Decemberbalance December
A
100%
what is Height egual PA031,malicn
Corporation's return31,2on0CYcorporat 20C
100%
25%
100%
100% C
what ís the asset turnover?
what profit margin will
Height Corporation earn f the
e assets? gesos.
70% d. what returnshould be
11%
2% 40% expected
the predictions are corect? on pedictions are correct?
corporate assets if the policy is adopted and
F 20% willthe company be better off
Average collection period
0%
30 days 5%
60 days
made? Explain your answer. financialy t the proposes change in credit pclicy is
(cma)
The vicepresident for finance recommends that Cost of alternative sOurce of short-tem
Height
with the expectation that sales and profitability will Corporation relax its credit standards, Corporation purchasedi financing. On March 1, 20CY, National
hasP100,000 worth ofiventory
increase. Staff
will be studies show that
National
In the past,
folowedthe policyon of making payment
sales can be expected toincrease to P92 million, bad debts credit with terms of 1/20,ne/60.
always
Inventory will need to be increased by P5.67 million, and average
receivable
approximately P2.4 credit
willbe 60 days. The 20CY Height statement of profit or losscollection of mil ion,
davs) after the goods are purchased 1 mcnth (30
is accounts
given bel Anew member of National's staff has
orked for never passed up ts Cash indicatedand that the company she has previousty
Height Corporation aliey. She has pOinted out to Nationaldiscounts she wonders if that is not a sound
Staterment of Profit or Loss that if it does not take
(in thousands of pesos)
discount, it should wait the entire advantage of tire casn
60-day peniod to pay the pay the full bill rather
For The Year Ended, December 31, 20CY paying within 30 days. than
Revenues:
ÉNational were to take
Credit sales advantage of the discount, and paid the bill on March 20 rather
shan on March 30, the firm
72 would have to borrow the
Cash sales davs. National's borrowing terms with a local bank arenecessarv funds for the ertra 10
P80 (annual rate), with a 15% percent compensating balance estimated to be at 81/2 percent
Cost and other charges: for the term of the loan. Most
members of Nationa's staff feels that it makes litle sense to take out an 1/2 percent
Manufacturing expenses 57.4 loan with a compensating balance of 15% in order to save alpercent on8its
by paying the account 10 days earlier than it had P100,000
Administcative expenses 3.0 planned.
Seling expenses** 96 70 Required:
Profrt before taxes 10 1. Just in terms of true interest cost, would it be to National's advantage to take
Income tax the percent discount by paying the bill 10 days earier than usual if to do this it
Profit 11 borrowedthe necessary amount on the above mentioned terms?
2. If National ordinarily paid 60 days after purchase (nstead ot 30 days), woukd the
Materials and supplies P10.0
company benefit by taking the discount if it had to borrow the money on the above
Labor 40.0 mentioned terms?
Fixed overhead 74 3. Compare your answers to (1) and (2) and explain what makes the discount more
(less) desirable under the conditions stated in (2) than in (1). (cma)
P57.4
Allfixed
Selling expenses:
Variable expenses P8.0
Bad debt loss estimate P 96
 887 RECEIVABLES MANAGEMENT

MULTIPLE CHOICE

Credit end collection pollcy

1 The goal of credit pollcy is to
Extend credit to the polnt where marginal profts equal
b Minimize bad debts losses.
Minimize collection expenses.
Imarginal costs
C
d Maximize sales.

2. It is held that the level of accounts receivable that the firm has or holds
the volume of afirm's sales on account and afirm's credit policies.
reflects
follow1ng items is not considered as part of the firms' credit policies? Which one ottthe
a The minimum risk group to which credit should be extended
b The extent(in terms of money) to which a firm will go to collecti an
C. The length of time for which credit is extended. accourt
d. The size of the discount that willbe offered.
(rpega,
3. In aset of comparative financial. statements, you observed a gradual decline in the ne
togross ratio, i.e., between net sales and gross sales. This indicates that:
There is stiffening in the grant of discounts to the customers.
b. The discount period is being lengthened. of the company.
C. There is adherence
to the collection policies
d. Sales volume is decreasing.
(rpcpa,
most likely increase as:
4 The level of accounts receivable will of days sales.
number
a. Cash sales increase and remain the ea
h Credit limits are eapanded, credit sales increase, and credit terms
Credit limits are expanded, cash sales increase, and aging of the receivahos :
C
improved. ratio to past due increases, credih Fb
d. Cash sales increase, current receivables
remain the same. (pcpa)
place is in Star Co. As Finance Director u
5. Astrict credit and collection policy is in relaxing the credit standards in view of sti
of
are asked to advise on the propriety willbe favorable if:
competition in the market. Your advise
thing, to prevent lost sales.
a. The competitor will do the same level of yOur product, and a more aggressive
b. There is adecrease in the distribution
share.
stance is necessary to retain market sales will exceed the cost of carrying the
C. The projected margin from increased
incremental receivables.
improving so the company can afford the carylng
d: The account receivable level is (pcpa)
cost of receivables.
CHAPTER17
RECEIVABLES MANAGEMENT 888

AAchangein credit policy has caused an teken,

areductionin the increasein sales,, anincrease in discounts
investrment accounts recetvables,
doubtful accounts. Based on in and a reduction in the number of
this
the net profit has increased informatlon we know thet
the bad debt
the size of thepercentage has increased
C discount offered has decreased.
the average collection
period has decreased (rpcpa)
7. Ifafimhad been extendi gtrade credit on a2/10, net/30 basis, what change would be
expected on the balance sheet of its customer if the
Increased fitm went to a net cash 30 policy?
h
payables and
Increased receivables increased bank loan.
e Decreased teceivables.
d Decreased in cash.
(rpcpa)
The credit:and collection policy of
when the credit line is exceededAmargo
8 Co. for the imposition of credit block
and/or the provides
account is past due..During the monn,
hecause of the campaign to achieve volume targets, the general manager nas Wa
the credit block policy in a number of instances
The likely effect of this move is involving big volume accounts.
a. Deterioration of aging of
h Increase in the level or receivables only.
C. Deterioration of aging and
receivables only.
d Decrease in collections during increase in the level of receivables.
the month the move was done. (rpcpa)
9 The Sales Director of Can Can Co. suggests that certain credit
terms be modified. He
estimates the following effects:
Sales will increase by at least 20%.
Accounts receivable turnover willbe reduced to 8times from the present tumover
of 10 times. s
Bad debts, nowat 1% of sales will increase to 1.5%. Sales before the
proposed
changes is at P900,000.variable cost ratio is 55% and desired rate of retun is 20%.
Fixed expenses armount to P150,000.

Should the company allow the revision of its credit terms?

a. Yes, because income will increase by P64,800.
b. Yes, because losses wil be reduced by P68,850.
C. No, because income will be reduced by P13,000.
d. No, because losses willbe increased by P28,000. (pcpa)
10. Numero Uno Co.s budgeted sales for the coming year are P96 million, of which 80% are
expected to be credit sales at terms of n/30. The company estimates that a proposed
relaxation of credit standards would increase credit standards would increase credit sales
by 30% and increase the average collection period from 30 days to 45 daya. Based ona
360-day year, the proposed relaxation of credit standards would resuBt to an an increase
Inaccouts receivable balance of
a. P6,880,000 P2,880,000
b. P1,920,000 d. P6,080,000 (rpcpa)
 889 RECEIVABLES MANAGEMENT

11, Slippers Mart has sales of P3 million,. lts credit period average and
CHAPTER 17 CHAPTER17
RECEIVABLES MANAGEMENT 890

to extend the credit period of 45 days which willincrease salesgeneral comanager

l ect ion peri o d
are both 30 days and 1%of its sales end up as bad debts. The P4,800,000
by P2,880,000

carrying receivables products andHoinwteevnedrs,

C. P3,000,000
bad debts losses on the incremental sales would be 3% Costs of P300, 0 00. d.
P4,080,000
expenses amountto 40% exclusivee of the cost s Wasting (rpcpa)
expenses. Assuming 360 days ayear, the changeein policy would resuts
of
$15% and badreldebtateds 16. Resource Co. has
period is 40 days, and bad annual credit sales of PA
investments in receivables of sto debts are 5% of sales. The mil ion.
Its average collection
a. P24,704
b. P65,000
C.
d.
P701,573
P162,500
incremental considering
to 2% to institutinga
total sales, stricter
and the
sales would also fall by an average
credit and
collection policy, whereby bad debtscollection manager
would be reduced
collection period would fall to 30 days. However,
is

(rpcpa) andthe cost of

(carrying estimatedisP500, 000 annually. Variable cost are 60% of sales
12. Crest, Co. has the opportunity to increase annual sales by P1 million
riskier customers. It has been estimated that uncollectible expenses by b to ayear, the
increment recei
al changevabl es 12%.
the profitabilAssumi
selling ityof theneg company if stricter policy would
in a tax rate of 35% and 360 days
collection costs 5%. The manufacturing and selling costs are 70% of would be 15% new
he implemented would be
and Teroas the positive 'and
taxis 35%. If they pursue this opportunity, the after tax profit will: sales and negative effects offset each other
a. Increase by P35,000 Increase by P65,000 corporate b
C A
Areduction in net
income
reduction in net income by byP46,280.
b. Increase by P97,500 Remain the same d A
reduction in net P38350.
income by P35,400.
13. Prest Corp. plans totighten its credit policy. Below is the summary of (rpcpa) . firm sells on terms of 2/10 net 60. It
(rpcpa)

Average number of days collection

Old
75
New
50
changes On 60% of sales, sells 1.000 units
CUstomerS take the cash discount Onpertheday at a unit price of Pi0
Ratio of eredit to total sales 70% 60% customers pay, on average, in 70 days. What would be the remaining 40 Oi sales,
accounts receivable if the firm intiates a more impact on the balance oT
toreduce the average aggressive collection policy and is able
Projected sales for the coming year are P100 million and it is estimated
that the new cash discount? (Assumepayment period to 60 davs for
sales levels are unaffected bythose customers not taking the
policy will be a5% lossif the new policy is implemented..Assuming the change in policy.)
a
is the effect of the new policy on accounts receivable?
Decrease of P13 million C Decrease of P5 million
a360-day year, what a. Decrease by P4,000.
b. Decrease by P240,000.
C.
Decrease by P40,000.
d Decrease by P280,000.
(cia)
b. No change d Decrease of P6,666,667 18 The Liberal Sales Co. budgeted sales for
(rpepa) are expected to be on credit. The
the coming vear are P30 million of which
80%
14 The Liberal Sales Co. budgeted sales for the coming year are P30 milion of
which gh company
to 2/10,n/30. lf the new credit terms are wants to change its credit terms from n/30
are expected to made on credit. The company wants to change its credit terme adopted, the company estimates that cash
n/30 to 2/10, n/30 If the new credít terms are adopted, the company estimates that discounts would be taken on 40% of the credit
cash discounts would be taken on 40% of the credit sales and the uncollectible amt would be unchanged. The adoption of the newsales and the new uncollectible amount
credit terms would result in expected
would be unchanged. The adoption of the new credit terms would resut in expected discount availed of inthe coming year of
P600,000
discount availed of in the coming year of b. P288,000
P480,000
a. P600,000 c. P480,000 P192,000 (rpcpa)
b. P288,000 d. P197,000 (rpcpa) Accounts receivable balance
15. Mr. SMart assumed the presidency of Riches Cop. He instituted new policies and with
19. Hakuna Inc. sells on terms of 3/10 net 30 days Gross sales for the year are
respect to credit policy, below is a summary of relevant information:
and the collections department estimates that 30 percent of the customersP2,400,000
pay on the
tenth day and take discounts; 40 percent pay on the thirtieth day; and the remaining 30
Credit policy percent pay,on the average, 40 days after the purchase. Assuming 360 days per year,
Old New
Sales what is the average-collection period?
P1,800,000 P1,980,000 40 days C 20 days
Average collection period 30 days 36 days b 15days d. 27 days (rpcpa)
The company requires a rate of return of 10% and a variable cost ratio of
36U-day year, the pre-tax cOst of carrying the additional investment in 60% Using a 20. Ten Q's Inc. has an inventory conversion period of 60 days, areceivable conversion period
the new policy would be recevables under of 35 days, andapayment cycle to 26 days. If its sales for the period just ended amounted
to P972,000, what is investment in accounts receivables? (assume 360 days in year).
 RECEIVABLES MANAGEMENT CHAPTER17
g91
CHAPTER ) RECEVABLES MANAGEMENT
glcherdeon Supply has a $100
P8S,200
P94,500 25
coneher
take the
discount invelce
or place
with payment
the in aterms
of 2/10 net 40 8ehardson
b P72450
P79,600 Interest Using a
12.2%. 360-day Pichardson'funds
yoar, s cost of money
sales amountedto P1.200.000 sold on terms of 3
21 Simba Corp. whose grosSestimated that 30 percent of the customers
(rpcpa) 6.4%. 87%
not talking the cash
dscoutiS

The collections manager

day and take d1scounts; 40 percent
pay, on the average, 40
days after the
davs:
on the thirtieth
purchase. If management
pay on the
and the remaining
would
3/10,nettenth30
30 percent 26.
Memimill,Inc.
deyyesr, the the
purchased
companys
an tem on
annual interest
6 2%

credit with terms of 3/10,,n/45 Baed on a 360-

(ema)

thetoughen on ns day of the credit cost of

and require that all nondiscounts customers pay on payment on last foregcing
the cash discOunt and maing
colection policy period is
how much would be the
a. P60,000
receivablesbalance?
P70,000 thirtieth day. a. 24.00%
24.74% 3181%
d Zero 30 86% trocpa)
b. P80,000
on terms 2/10, net 30, b°t generally does not pay until 400
(rpcpa) 27.
The afcial terms of purchases of UTang &.Co. aae
ater the invoice date. The2/10
does not pay until 40 cdays net 30 but t generally the compary
22 Batchoy &Co buyspurchases
days adaysyear,afttheer Assuming360 days a
totalIP2,160,000 per year. Assuming 360 ppurchases total P3,600,000 per ar
the invoice date. It year, the approxtmate cost of the
amont of non-free" trade credit used by the company on the average
C. P60,000
18.36%
24.50% 21 90%
non-free trade credit amounts to
P180,000 b
d P120,000 19 40% (rpcpa)
b. P240,000
(rpcpa) 28. Ifa
firm purchases raw
materials from its
Effective discount rate the equivalent annual interest rate (using suppliers on a 2/10,1 n/60 cash discount bass,
a 360-dayy year) offoregoingthe cash discount
andmaking payment on the 60 days is
36.7%
23. Three suppliers of Mom Corp..offer different credit term. Core Co. offers term of 1 a.
C 73.5%
60. S/15,
net 30. Doug Corp. offers terms of 1/10, net 30. Ernst Inc. offers off2/10,
2 net b. 14.7%
Mom d. 12.2% (rpcpa)
Corp. would have to borrow from a bank at an annual rate of 12% in order to take any
Which one of the following would be the most attractive an Regal Corp. purchased an item on credit with
cash discounts. for Ma Corp.? terms 3/n0. n/45. Using a 360-day year,
(Assume 360 days a year.) the company's annual interest cost of foregoing the cash discount
and maling payment
a. Purchase from Core Co., pay in 15 days and borrow any monéy neededd
from the bank. onthe last day of the credit period is
h Purchase from Core Co., pay in 30 days and borrow any money needed the han 30.93% C. 24.74%
Purchase from Ernst Inc., pay in 60 deys and bórow any money needed from the hs b. 31.81%
30.86% (rpcpa)
d. Purchase from Doug Corp and pay in 30 days
(rpepa) a0 Frances Co. buys on terms 2/10, net 30, but generaly does not pay until 40
24. Software Center, Inc.'s new controller is reviewing the company's cash the invoice date. ts purchases total P2,160,000 per vear. Assuming 360 days after
management.
Below arerelevant information regarding tradeecredits fromthe suppliers of the the amount of "non-free trade credit used by thee company on the days a year,
Suppliers Average Monthly Purchases
100,000
Credit terms company: P180,000 P60,000
average each year is
Tech Co. Net 30 b P240,000 d. P120,000
300,000 (rpcpa)
Computech 2/10, n/30
Compuworks 1,000,000 5/10, net 120 31. On cash discounts, all of the following statements do not apply except
600,000 3/10, Net 45
Sowares
a. Ifa frm buys P10,000 of goods onternsof 1/10, net 30 and paya within the discount
period, the amount paid would be P9,000.
The company uses a 360-day year. Assume that all of the suppliers can supply any and b
The cost of not taking acash discount is always higher than the cost of a bank loan.
all of the requirements of software and can provide unlimited credit line to the compAny C
With trade terns of 2/15, net 60, if the d_count is taken the buyer receives 45 days
and that the company can have only one supplier. Witha cost of bank borrowing of 18% of free credit
per annum, which supplier should Software will choose? d The costof not taking the discount is higher for terms of 2/10, net 60 than for 2/10,
a Compuworks due to the longest credit term of 120 days. net 30 (rpcpa)
b. Computech due to cost to trade credit of 36.7%.
c. Compuworks due to the highest trade discount at 5%.
d. Tech Co. due to no discount policy. (rpepa)
 CHAPTER1)
RECEIVABLES MANAGEMENT
RECEVAALES MANAG,EMENT
893

32 Afirm that often

factors its accOunts
tecervable has an
agreement
CHAPTERI
with
) 6
Four Q
inc
perlodol3q5
has afn
days, andinventOry conversion
#04

cycle to 26peiod
a 6% reserve and ts a of 60 dsys. racetvahie crSOn
0ompany that reqQuires the frm
to ma1nta1n
would be
charges 1% fnance amountedto
pg72,000, payment davs Ifs sales
interest charge of 10%
of cash (rounded to the
on the
The net proceeds
on the amount of receBvables monies advanced
nearest peso) will the frmn
furthet reduced
Assuming a 360-dayy by an
yeat, commianouannals son
receive from the finance what
cor
in a year)
(rpcpa)
P85,200
what is
investment in
sccounts recatv
for the period ust det
abies

financeecompay at
the time a P100,000 account that is due in 90 days is turned over to thef P72,450 p94 500
P79 600
P93,000
P90,000
C P83.700
P90,675 company Inc sells on terms of 3/10 net
18 MUcollectiong 30 days Gross
(cma) the
take department estimates
that 30 sales for the yar
percent of the
re P2400 00 srd
The next2 questions are based on the
following informetion
is a cafe that offers customers
day and
the discounts, percent
40
average, pay
40 days after the on the thirtieth day. andcustoma
CyberAge Outlet, a relatively new store,
the opportunty pay, on the remain1ng 30 percent
browse the internet or play computer games at ther tables while they the average collection period? (rpcpa) purchase ASSum1ng 360 days cer ya, Nhat
to
The customer pays afee based on
the amount of time spent signed onn
to drinkcoffee
the comput
40 days
C 20 davs
sells books, tee-shirts, and computer accessories. er 15 days

fortCyberAge
The store also
has 27 days
all been
paymnent period, thus
paying all of its bils on the last day of the eiting supplher DIstributors sells to retatl
discounts Shown beiow are data on CyberAgestwo major vendors,
monthly purchases and credit terms ,including average
38 J stores on credit terms of
150 units at a price of P300 each
etomers take the discount and pay Assum1ng
2/10, ret 30 Dauly sales aversge
that all sales are on credit and 60% of
on day 10 wbile the cest ot the
Verndor Average Monthly Purchases Credit Terms day 30, tthe amount of J's
accounts recervable is customers Day
Web Master P25.000 2/10, net/30 P1,350,000
5/10, net/90 p 999,000 P 900.000
Soft1dee 50,000 b
P 810000
Assuming a 360-day and that CyberAge continues paying on the last day of the credn Afrm averages P4,o00 in sales per day and is
33 paid. on averace, with1n 30 days ot e
period, the company's weighted average annual unterest rate for trade credit (ignoring ale After they recerve their invoice, 55% of the customers 0ay by
vendors is check, whiie the
the effects of compounding) for these two (cma) Pamaining 45% pay by credit card Approximately how much
would the company scw
270% C 28.0% in accounts receivable on rts balance
30.2% P 4.000
sheet cn any ven data?
b -25 5% P48 000
b P120,000
s P54, 000 (cma)
24 Should CyberAge use trade credit and continue paying at the end of the credit
Yes, if the cost of alternative short-term financing is less. o0 RST Computers believes that its collection
b Yes, if the firm's weighted average cost of capital is equal to the weighted of collection procedures. This action is costs could be reduced through mod1fcation
cost of trade credit. average expected to resut in a lengthenng of the
average collection period from 28 days to 34 days: however, there will be no change in
C No, if the cost of alternative long-term financing is greater. uncollectíble accounts. The company's budgeted credit
d Yes, if the cost of alternative short-term financing is greater. (cma) P27.000,000, and short-term interest rates are expected sales for the com1ng year are
to average 8%. To make the
changes in collection procedures cost benefic1al. the min1mum
costs (using a 360-day yar) for the year would have to be: (cma) savings collection
in
Accounts receivable portfolio analysis
P 30,000 C P180.000
35 Which of the following represents a firm's averagegross receivables balance? b P360,000 d P36,000
Days sales in receivables x accounts receivable turnover.
Average daily sales xaverage collection period. 38. The average collection period for a firm measures the number of
days
Net sales l average gross receivables. (cma) a. After a typical credit sale is made until the firm receives the payment
b For a typical check to "clear through the banking system
Ionly C Il only C Beyond the end of the credit period before a typical customer payment is recerved
b land Il only d l and Ill only. d Before a typical account becomes delinquent (cma)
 CHAPTER17
CHAPTER17 RECEIVABLES MANAGEMENT
895 preparingits
RECEIVABLES MANAGEMENT 896

Which one of the following statements is most correct if a seller extènds

44. In budget
information available:for July 20CY, Joy
39.
purchase for aperiod of time longer than the purchaser's operating cycle? The credit to a Accounts,receivable at
June
Company has the efollowing accountsreceivable
Will have alower of accounts receivable than those companies whose credit seller Cetimated
Estimatedcredted sales fore30, ,20CY, P350,000
in JuiyJuy,
period P 400,000
is shorter than the purchaser's operating cycle.
Estimated collections for credit sales in Juy andd prior months, P320,000
Estimated write-offs
b Is, in effect, financing more than just the purchaser's inventory needs,. in July for
Can be certain that the purchaser will be able to convert the
inventory into caash provision for doubtfuluncollectible
accourts forcredt
creditsales,
before payment is due. salesP16,000
in
Juty, P14,000
d. Has no need for a stated discount rate or creditperiod.
(cma) hat is the
projected balance of accounts recervatble at uty
P 402,000
The next two questions are based on the following information: a. 31, 20CY?
To improve the credit and collection policies ofMaeMae Corporation, the followine .. b. P430,000 P 414000
for 20CY were gathered for study: d. P 426,000
(rpcpa)
45. On September15,20CY, LTW
Accounts receivable, January 1 20% interest bearing note datedCorporation accepted from aacustomer aP100,000.90-day
Accounts receivable, December 31 P112,000 the note at the Western Bank atonathe same day. On October 15. 20CY, LTW dscouted
Bad debts losses 140,000
6,300
23% discOunt rate The
maturity, Based on a 360-day, what amount should LTW reoort customer paid the note at
Allowance for uncollectible accounts, January 1 10,500 from the note transaction? as net interest revenue
Allowance for uncollectible accounts, December 31 7,000 a. P 975
Sales (al sales were made oncredit) P20,000 C. P5,000
630,000 b
P4,025 (pcpa)
40 What was the total cash collected from customers during 20CY?
a P592,200 C. P599,200
b P598,5000 d P605,500
e none of these
(rpcpa)
41. What was the accounts receivable turnover (rounded to the nearest centavo)?
a. 5.37 4.70
b. 5.00 4.68
e none of these (rpcpa)
42. By the end of the this year you expect to have a cash balance of P500,000, Which of
these trarsactions /indicators (not considered in your estimate) willreduce this balance.
a. modification on credit terms to customers will reduce credit sales
A
b. Adialogue with key suppliers will allow discounts on extended payment terms
Anew machine will be bought with proceeds from a bank loan that will carry a 17%
interest per annum and monthly payments over 2'years
d The ratio of current trade receivables to total receivables will decrease (rpcpa)
43. Kiks Company's account balance at June 30. 2014 for
accounts receivable and related
allowances for doubtful accounts were P600,000 and P3,000, respectively. Aging or
accounts receivable indicated that P48.000 of the June 30, 2014
uncollectible. Net realizable value of receiyable may be
a. P597,000 accounts receivable were
b. P552,000 P539,000
d. none of these. (rpcpa)
END OF CHAPTER 17