Effective credit management involves establishing credit standards for extending credit to customers, determining the company’s credit terms, and setting up procedures for invoicing and collecting past-due accounts. The following statement refers to a credit management policy. Select the best term to complete the sentence. A. How a company handles its credit accounts, including methods of invoicing and collecting past-due accounts, is indicated by the company’s . Consider the case of Sombra Corp.: Sombra Corp.’s CFO has decided to take a closer look at the company’s credit policy. Sombra Corp. has annual sales of $384.4 million, and it currently has an accounts receivable balance of $45.9 million. The first step in analyzing the firm’s credit policy is to determine its days sales outstanding (DSO). B. Based on this information, Sombra Corp.’s DSO is . (Note: Use 365 days as the length of a year in all calculations.) C. The average DSO for Sombra Corp.’s industry is 51.7 days. Assuming that its sales stayed the same, what would be Sombra Corp.’s receivables balance if it maintained the industry average DSO? D. Sombra Corp.’s CFO thinks that the company has not done a very good job of enforcing its credit policy. The CFO believes that if the company were to better enforce its credit policy, it would reduce its DSO to 30 days; however, this will cause Sombra Corp. to lose 6% of its sales revenue. What would Sombra Corp.’s expected accounts receivables balance be if it decides to tighten its credit policy? $28,213,917 $34,153,689 $32,668,746 $29,698,860

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Effective credit management involves establishing credit standards for extending credit to customers, determining the company’s credit terms, and setting up procedures for invoicing and collecting past-due accounts.

The following statement refers to a credit management policy. Select the best term to complete the sentence.

A. How a company handles its credit accounts, including methods of invoicing and collecting past-due accounts, is indicated by the company’s .

Consider the case of Sombra Corp.:

Sombra Corp.’s CFO has decided to take a closer look at the company’s credit policy. Sombra Corp. has annual sales of $384.4 million, and it currently has an accounts receivable balance of $45.9 million. The first step in analyzing the firm’s credit policy is to determine its days sales outstanding (DSO).

B. Based on this information, Sombra Corp.’s DSO is . (Note: Use 365 days as the length of a year in all calculations.)

C. The average DSO for Sombra Corp.’s industry is 51.7 days. Assuming that its sales stayed the same, what would be Sombra Corp.’s receivables balance if it maintained the industry average DSO?

D. Sombra Corp.’s CFO thinks that the company has not done a very good job of enforcing its credit policy. The CFO believes that if the company were to better enforce its credit policy, it would reduce its DSO to 30 days; however, this will cause Sombra Corp. to lose 6% of its sales revenue. What would Sombra Corp.’s expected accounts receivables balance be if it decides to tighten its credit policy?

$28,213,917

$34,153,689

$32,668,746

$29,698,860

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