Originally Posted by jarris
Assume that Hickory Company has the following data related to its accounts receivable:
2005 2006
Net sales $1,425,000 $1,650,000
Net receivables:
Beginning of year 375,000 333,500
End of year 420,000 375,000
Use these data to compute accounts receivable turnover ratios and average collection periods for 2005 and 2006. Based on your analysis, is Hickory Company managing its receivables better or worse in 2006 than it did in 2005?
The president, vice president, and sales manager of Moorer Corporation were discussing the company's present credit policy. The sales manager suggested that potential sales were being lost to competitors because of Moorer Corporation's tight restrictions on granting credit to consumers. He stated that if credit policies were loosened, the current year's estimated credit sales of $3,000,000 could be increased by at least 20% next year with an increase in uncollectible accounts receivable of only $10,000 over this year's amount of $37,500. He argued that because the company's cost of sales is only 25% of revenues, the company would certainly come out ahead.
The vice president, however, suggested that a better alternative to easier credit terms would be to accept consumer credit cards such as VISA or MASTERCARD. She argued that this alternative could increase sales by 40%. The credit card finance charges to Moorer Corporation would be 4% of the additional sales.
At this point, the president interrupted by saying that he wasn't at all sure that increasing credit sales of any kind was a good thing. In fact, he suggested that the $37,500 of uncollectible accounts receivable was altogether too high. He wondered whether the company should discontinue offering sales on account.
With the information given, determine whether Moorer Corporation would be better off under the sales manager's proposal or the vice president's proposal. Also, address the president's suggestion that credit sales of all types be abolished.
Working Capital Management. Indicate how each of the following six different
transactions that Dynamic Mattress might make would affect (i) cash and (ii) net working
capital:
a. Paying out a $2 million cash dividend.
b. A customer paying a $2,500 bill resulting from a previous sale.
c. Paying $5,000 previously owed to one of its suppliers.
d. Borrowing $1 million long-term and investing the proceeds in inventory.
e. Borrowing $1 million short-term and investing the proceeds in inventory.
f. Selling $5 million of marketable securities for cash.
Quiz
4. Lock Boxes. Anne Teak, the financial manager of a furniture manufacturer, is considering
operating a lock-box system. She forecasts that 400 payments a day will be made to lock
boxes with an average payment size of $2,000. The bank's charge for operating the lock
boxes is $.40 a check. The interest rate is .015 percent per day.
a. If the lock box saves 2 days in collection float, is it worthwhile to adopt the system?
b. What minimum reduction in the time to collect and process each check is needed to
justify use of the lock-box system?
Refer to the data in Practice 21-4. Based on DuPont's return on investment (ROI) formula, which company performed better during the period?
Company A Company B
Beginning total assets $ 183,000 $ 92,000
Ending total assets 192,000 95,000
Cost of Goods sold 1,360,000 420,000
Revenue 1,840,000 870,000
