Chapter 3: Q10BP (page 221)
Mervyn’s Fine Fashions has an average collection period of 50 days. The accounts receivable balance is $95,000. What is the value of its credit sales?
The value of credit sales is $684,000.
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Route Canal Shipping Company has the following schedule for aging of accounts receivable:
c. If the firm likes to see its bills collected in 35 days, should it be satisfied with the average collection period?
Commercial paper may show up on corporate balance sheets as either a current asset or a current liability. Explain this statement.
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.
c. Should Henderson liberalize credit if a 16 percent after-tax return on investment is required?
How is a cash budget used to help manage current assets?
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.
b. What would be Henderson’s incremental after-tax return on investment?
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