 MAS : RECEIVABLE MANAGEMENT

RECEIVABLE MANAGEMENT - the formulation and administration of plans and policies

related to sales on account and ensuring the maintenance of
receivables at a predetermined level and their collectability as
planned.
 Credit Policy
 Collection Policy

Ratios affecting Receivables

AR Turnover = Net Credit Sales/ Ave. AR Balance

Collection period = 36x days/ AR Turnover
Ave. AR = [(AR beg. + AR ending)/ 2]
Ave. AR = Ave. Daily Sales x Collection Period

MULTIPLE CHOICE QUESTIONS

1. Palm Company’s budgeted sales for the coming year are P40,500,000 of which 80% are
expected to be credit sales at terms of n/30. Palm estimates that a proposed
relaxation of credit standards will increase credit sales by 20% and increase the
average collection period from 30 days to 40 days. Based on a 360-day year, the
proposed relaxation of credit to standards will result in an expected increase in
the average accounts receivable balance of
A. P540,000 C. P2,700,000
B. P900,000 D. P1,620,000

Items 2 and 3 are based on the following information:

A company plans to tighten its credit policy. The new policy will decrease the average
number of days in collection from 75 to 50 days and reduce the ratio of credit sales to
total revenue from 70 to 60%. The company estimates that projected sales would be 5%
less if the proposed new credit policy were implemented. The firm’s short-term
interest cost is 10%.

2. Projected sales for the coming year are P50 million. Calculate the dollar impact on
accounts receivable of this proposed change in credit policy. Assume a 360-day
year.
A. P 3,819,445 decrease. C. P 3,333,334 decrease.
B. P 6,500,000 D. P18,749,778 increase.

3. What effect would the implementation of this new credit policy have on income before
taxes?
A. P2,500,000 decrease. C. P83,334 increase.
B. P2,166,667 decrease. D. P33,334 increase.

4. Caja Company sells on terms 3/10, net 30. Total sales for the year are P900,000.
Forty percent of the customers pay on the tenth day and take discounts; the other
60 percent pay, on average, 45 days after their purchases.

What is the average amount of receivables?

A. P70,000 C. P77,200
B. P77,500 D. P67,500

5. The Camp Company has an inventory conversion period of 60 days, a receivable

conversion period of 30 days, and a payable payment period of 45 days. The Camp’s
variable cost ratio is 60 percent and annual fixed costs of P600,000. The current
cost of capital for Camp is 12%.

If Camp’s annual sales are P3,375,000 and all sales are on credit, what is the
firm’s carrying cost on accounts receivable, using 360 days year?
 A. P281,250 C. P20,250
B. P168,750 D. P56,250

6. Mercury distributor sells to retail stores on credit terms of 2/10, net/30. Daily
sales average 150 units at a price of P300 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, the amount of Mercury’s accounts receivable is
A. P1,350,000 C. P900,000
B. P990,000 D. P810,000

7. The average collection period for a firm measures the number of days

A. After a typical credit sales is made until the firms receives the payment.
B. For typical check to “clear” through the banking system
C. Beyond the end of the credit period before a typical customer payment is
received.
D. Before a typical accounts becomes delinquent

8. Currently, La Carlota Company has annual sales of P2,500,000. Its average

collection period is 45 days, and bad debts are 3 percent of sales. The credit
and collection manager is considering instituting a stricter collection policy,
whereby bad debts would be reduced to 1.5 percent of total sales, and the average
collection period would fall to 30 days. However, sales would also fall by an
estimated P300,000 annually. Variable costs are 75 percent of sales and the cost
of carrying receivables is 10 percent. Assume a tax rate of 40 percent and 360
days per year.

What would be the decrease in investment in receivables if the change were made?

A. P9,688 C. P96,875
B. P12,988 D. P129,975

Question Nos. 7 through 9 are based on the following data :

Sonata Company is considering changing its credit terms from 2/15, net 30 to 3/10,
net 30 in order to speed collections. At present, 40 percent of Sonata Company‘s
customers take the 2 percent discount. Under the new term, discount customers are
expected to rise to 50 percent. Regardless of the credit terms, half of the
customers who do not take the discount are expected to pay on time, whereas the
remainder will pay 10 days late. The change does not involve a relaxation of credit
standards; therefore bad debt losses are not expected to rise above their present 2
percent level. However, the more generous cash discount terms are expected to
increase sales from P2 million to P2.6 million per year. Sonata Company’s variable
cost ratio is 75 percent, the interest rate on funds invested in accounts receivable
is 9 percent, and the firm’s income tax rate is 40 percent.

9. What are the days sales outstanding (DSO) before and after the change of credit
policy?
A. 27.0 days and 22.5 days respectively
B. 22.5 days and 27.0 days, respectively
C. 22.5 days and 21.5 days, respectively
D. 21.5 days and 22.5 days, respectively

10. The incremental carrying cost on receivable is

A. P843.75 C. P643.75
B. P8,899 D. P6,667

11. The incremental after tax profit from the change in credit terms is
A. P68,493 C. P60,615
B. P64,640 D. P57,615

Free trade credit

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12. Phillips Glass Company buys on terms of 2/15, net 30 days. It does not take
discounts, and it typically pays 30 days after the invoice date. Net purchases amount
to P730,000 per year. On average, how much “free” trade credit does Phillips receive
during the year? (Assume a 365-day year.)
A. P30,000 C. P50,000
B. P40,000 D. P60,000
13. HBC Inc. buys on terms of 2/10, net 30 days. It does not take discounts, and it
typically pays 30 days after the invoice date. Net purchases amount to P1,750,000 per
year. On average, how much “free” trade credit does HBC receive during the year?
(Assume a 365-day year.)
A. P25,293.45 C. P68,651.33
B. P47,945.21 D. P75,000.00

14. Garo Company, retail store, is considering foregoing sales discounts in order to
delay using its cash. Supplier credit terms are 2/10, net 30. Assuming a 360-day
year, what is the annual cost of credit it the cash discount is not taken and Garo
pays net 30?
A. 24% C. 36%
B. 24.5% D. 36.7%

15. The high cost of short-term financing has recently caused a company to reevaluate
the terms of credit it extends to its customers. The current policy is 1/10, net 60.
If customers can borrow at prime rate, at what prime rate must the company change
its terms of credit in order to avoid an undesirable extension in its collection of
receivables?

A. 2% C. 7%
B. 5% D. 8%

16. Which of the following statements is most correct?

A. A firm that makes 90 percent of its sales on credit and 10 percent for cash is
growing at a rate of 10 percent annually. If the firm maintains stable growth
it will also be able to maintain its accounts receivable at its current level,
since the 10 percent cash sales can be used to manage the 10 percent growth
rate.
In managing a firm’s accounts receivable it is possible to increase credit
B.
sales per day yet still keep accounts receivable fairly steady if the firm can
shorten the length of its collection period.
If a firm has a large percentage of accounts over 30 days old, it is a sign
C.
that the firm’s receivables management needs to be reviewed and improved
Since receivables and payables both result from sales transactions, a firm with
D.
a high receivables-to-sales ratio should also have a high payables-to-sales
ratio.

17. Which of the following statements is most correct?

A. If credit sales as a percentage of a firm’s total sales increases, and the
volume of credit sales also increases, then the firm’s accounts receivable will
automatically increase.
It is possible for a firm to overstate profits by offering very lenient credit
B.
terms that encourage additional sales to financially “weak” firms. A major
disadvantage of such a policy is that it is likely to increase uncollectible
accounts.
A firm with excess production capacity and relatively low variable costs would
C.
not be inclined to extend more liberal credit terms to its customers than a
firm with similar costs that is operating close to capacity
D. Firms use seasonal dating primarily to decrease their DSO.

18. All of these factors are used in credit policy administration except:
A. credit standards C. peso amount of receivables

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 B. terms of trade D. collection policy

19. Changing a firm’s credit terms from 2/20, net/60 to 2/10, net/30 will generally
A. Increase the average collection period and increase sales.
B. Increase the average collection period and reduce sales
C. Reduce the average collection period and increase sales.
D. Reduce the average collection period and reduce sales.

20. The primary objective of in the management of accounts receivable is

A. To achieve that combination of sales volume, bad debt experience, and
receivables turnover that maximizes the profits of corporation.
B. To realized no bad debts because of the opportunity cost involved.
C. To provide the treasure of the corporation with sufficient cash to pay the
company’s bills on time.
D. To coordinate the activities of the manufacturing, marketing, and
financing so that the corporation can maximize its profits

21. An increase in a firm’s collection period means

A. The firm’s current ratio is increasing.
B. The firm’s receivable turnover ratio is increasing.
C. The firm’s collection expenses have fallen.
D. The firm has become less efficient n the collection of its receivables.

22. A change in credit policy has caused an increase in sales, an increase in discount
taken, a reduction in the investment in accounts receivable, and reduction in the
number of doubtful accounts. Based upon the information, we know that
A. Net profit has increase
B. The average collection period has decreased.
C. Gross profit has declined.
D. The size of the discount offered has decreased.

“Don’t hate what you don’t understand”

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