RECEIVABLES MANAGEMENT

1. A2Z Company writes and receives checks totaling P150,000. If it takes six days for the checks to clear and be deducted from
the company’s account, and only three days for the deposits to clear, what is the float (in amount)?

Solution:
Float = (6 – 3) (P150,000)
= P450,000

Answer: The float is P450,000.

2. Momentum Company is considering a change in its credit terms from n/45 to 3/15, n/40. The company’s budgeted sales for
the coming year are P30,000,000, of which 85 percent are expected to be made on credit. If the new credit terms were
adopted, Momentum Company estimates that discounts would be taken on 75 percent of the credit sales; however,
uncollectible accounts would be unchanged. The new credit terms would result in expected discounts taken in the coming
year of _____

Solutions:
Sales P30,000,000
x .85
Credit sales P25,500,000
x .75
Total P19,125,000
x .03
Discount taken P573,750

Answer: The new credit terms would result in expected discounts taken in the coming year of P573,750.

3. Mayfruits Company is considering relaxing its credit standards to increase its currently sagging sales. As a result of the
proposed relaxation, sales are expected to increase from 15,000 units to 20,000 units during the coming year; the average
collection period is expected to increase from 30 to 45 days; and bad debts are expected to increase from 1% to 2.5% of sales.
The sales price per unit is P120, and the variable cost per unit is P72. If the firm’s return on equal-risk investments is 20%,
determine the net advantage (disadvantage) of relaxing the credit standard.

Solutions:
CMR 40%

Before the change After the change Change

Net sales P1,800,000 P2,400,000 P600,000
Collection period 30 45
Receivable turnover 12x 8x
A/R balance 150,000 P300,000 P150,000
Bad debts (Net sales x Bad debt rate) P18,000 P60,000 P42,000

Increase in CM (5,000 x P120 x .4) P240,000

Increase in bad debts (42,000)
Increase in opportunity cost
(P150,000 x .6 x .20) (18,000)
Net advantage of relaxing the credit standard P180,000

Answer: The net advantage of relaxing the credit standard is P180,000.