Solution manual managerial accounting and finance for hospitality operations CHAPTER 14

The goal of accounts receivable management is to ensure that the firm’s investment in accounts receivable is appropriate and contributes to shareholder wealth maximization.. Credit polic

CHAPTER 14 CREDIT MANAGEMENT

I Questions

1 The goal of accounts receivable management is to ensure that the firm’s investment in accounts receivable is appropriate and contributes to shareholder wealth maximization

2 Credit policy is a set of guidelines for extending credit to customers

3 Credit standards are criteria and guidelines used by the firm to determine which customers get credit and how much credit each customer gets

Credit terms specify the repayment terms required of all customers Credit terms include the cash discount, the cash discount period, and the credit period

4 Collection policy refers to the procedures used to collect late accounts Collection policy involves three steps: determining when to begin the collection efforts, selecting the collection methods, and evaluating the potential tradeoffs

of increased collection expenditures

5 Credit analysis is the process of evaluating individual credit applicants Credit analysis involves three steps: obtaining information about the credit applicant, analyzing the credit information, and making the credit decision

6 The five Cs of credit are character, capacity, capital, collateral, and conditions These factors are used to screen credit applicants

II True or False

14-2 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations

III Practical Problems

PROBLEM 1

1 The average collection period is 27 days

0.3 (10 days) + 0.4 (30 days) + 0.3 (40 days) = 27 days

2 The current receivables balance is P90,000

Receivables = (ACP) (Sales / 360) = 27 (P1,200,000 / 360) = P90,000

PROBLEM 2

1 The incremental change in receivables investment would be calculated as follows:

Old credit policy : (ACP) (Sales per day) (Variable cost ratio)

(40) (0.6) = P133,333

New credit policy : (ACP) (Sales per day) (Variable cost ratio)

(30) (0.6) = P87,500

The incremental change in receivables is P87,500 – P133,333 = – P45,833 2.

Income Statement under Current Policy Effect of Change

Income Statement under New Policy

Less Discounts

Net sales

Production costs 1,200,000 150,000 1,050,000 Gross profit before credit costs P 800,000 P(100,000) P 700,000 Credit related costs:

Cost of carrying receivables 16,000 5,500 10,500 Collection expenses

Bad debt losses 100,000 65,000 35,000 Gross profit P 684,000 P (29,500) P 654,500 Tax (40%) 273,600 11,800 261,800 Net income P 410,400 P (17,700) P 392,700

P2,000,000 360

P1,750,000 360

Credit Management 14-3

PROBLEM 3

1 Substituting credit sales of P4,000,000 and accounts receivable of P500,000 in the equation below,

Accounts receivable turnover =

the accounts receivable turnover is:

Accounts receivable turnover = = 8 times

2 Using the equation below,

Average collection period =

the average collection period is:

Average collection period = = 45.6 days

PROBLEM 4

Substituting bad debt expenses of P125,000 and credit sales of P5,000,000 in the equation below,

Bad debt loss ratio =

the bad debt loss ratio is:

Bad debt loss ratio = = 0.025 or 2.5%

PROBLEM 5

1 The accounts receivable turnover is calculated by dividing 365 days by the average collection period of 25 days

Accounts receivable turnover = = 14.6 times

2 The opportunity cost is calculated by multiplying the average investment in accounts receivable by the required rate of return

Opportunity cost of investment in accounts receivable = P41,096 x 0.15

= P6,164 (rounded)

Net (credit) sales Accounts receivable

P4,000,000 500,000

365 days Accounts receivable turnover

365 8

Bad debt expenses Credit sales

P125,000 P5,000,000

365 25

14-4 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations