Chapter 8, Problem 8.6SDC

Critical Thinking: Analyzing the Impact of Credit Policies

Problem Solved Company has been operating for five years as a software consulting firm. During this period, it has experienced rapid growth in Sales Revenue and in Accounts Receivable. To solve its growing receivables problem, the company hired you as its first corporate controller. You have

put into place more stringent credit-granting and collection procedures that you expect will reduce receivables by approximately one-third by year-end. You have gathered the following data related to the changes (in thousands):

Required:

1. 1. Compute, to one decimal place, the accounts receivable turnover ratio based on three different assumptions:
   1. a. The stringent credit policies reduce Accounts Receivable, Net and decrease Net Sales as projected in the table.
   2. b. The stringent credit policies reduce Accounts Receivable, Net as projected in the table but do not decrease Net Sales from the prior year.
   3. c. The stringent credit policies are not implemented, resulting in no change from the beginning of the year Accounts Receivable balance and no change in Net Sales from the prior year.
2. 2. On the basis of your findings in requirement 1, write a brief memo to the chief financial officer explaining the potential benefits and drawbacks of more stringent credit policies and how they are likely to affect the accounts receivable turnover ratio.