Aliah Cyril M.

Hernandez

3BSA-1

Unit 6 Accounts Receivable Management

Engaging Activity

1. ABC company age of inventory is 90 days, age of receivable is 60 days, and age of payment is 30
days. If it’s for the period amount to P900,000, What is its investment in accounts receivable?
Assume 360 days in a year?

Receivable Turnover 360days ÷ 30days = 12

Receivable Balance P900,000 ÷ 12 = P75,000

2. Rhea sells merchandise to retail appliance store on credit term of net/60. Its annual credit sales
are P200,000,000 spread evenly throughout the year and its account average 20 days overdue.
The firm’s variable cost ratio is .75. Determine Rhea’s average investment in receivables.
Assume 360 days per year on all calculation.

Receivable Turnover P200,000,000 ÷ 360 = P555,555.56

Accounts Receivable P555,555.56 X 80 = P44,444,444.44
Investment in Receivables P44,444,444.44 X .75 = P33,333,333,33

3. Demetria Company grants credit term of 1/10, net /30 and projects a gross sales of P5,000,000
for the next year. The credit manager estimates that 20% of the firm’s customer pay on the
discount date. 30% on the net due date, and 50% pay 10 days after the net due date. Assuming
uniform sales and a 360 –days year, what is the projected days sales outstanding (rounded to
the nearest whole day)?

10days X 20% = 2
30days X 30% = 9 Average Collection Period = 2 + 9 + 20 = 31days
40days X 50% = 20

4. Adi Samonte is thinking of relaxing its credit standards to increase its declining sales. With the
proposed relaxation, sales are expected to increase by 20% from 20,000 units to 24,000 units in
2018. With the expected increase in sales, the average collection period will also be longer from
60 days to 75 days. Bad debts are also expected to increase from 2% to 4% of sales. The sales
price per unit is P150 and the variable cost per unit is P112.50. If the firm’s return in equal-risk
 investments in 20% , determine the net advantage or disadvantage of relaxing the credit
standard.

Increase in Unit Sales 4,000

CM per unit X 37.50
Incremental Profit P150,000

Current Bad Debts P3,000,000 X 2% = P60,000

Expected Bad Debts 3,600,000 X 4% = 144,000
Increase P 84,000

Receivable Turnover 360days ÷ 75days = 4.80

Receivable Balance P3,600,000 ÷ 4.8 = P750,000
Investments in Receivables P750,000 X .75 = P562,500

Receivable Turnover 360days ÷ 60days = 6

Receivable Balance P3,000,000 ÷ 6 = P500,000
Investments in Receivables P500,000 X .75 = P375,000

Expected Ave. Investment P562,500

Current Ave. Investment 375,000
Increase 187,500
ROI X 20%
Opportunity Cost. 37,500

Incremental Profit P150,000

Less: Increase in BDE 84,000
Opportunity Cost 37,500
Net Advantage P28,500

For Item 5-10 .

Krisha Co is considering a plan to ease its credit terms in order to generate revenue. Last year
krisha Co sold 2,000,000 units at a price and variable cost of P20 and P15, respectively. Its current
average collection period is 20 days and its percentage of bad debt expense is 2% while its required
return on investment is 10% . If krisha Co will ease its credit term, the firm anticipates that it will
increase to 2,500,000 units without a change in price or variable cost. However the average collection
period is expected to increase to 30 days and bad debt expense to increase to 3% .Assume 360 days in a
year.

5. What is the current average investment in accounts receivable?

Receivable Turnover 360days ÷ 20days = 18

Receivable Balance P40,000,000 ÷ 18 = P2,222,222.22
 Investments in Receivables 2,222,222.22 X .75 = P1,666,666.67

6. What is krisha Co’s expected increase in bad debt expense?

Current P40,000,000 X 2% = P800,000

Expected P50,000,000 X 3% = P1,500,000
Increase P700,000

7. What is the opportunity cost in the increased accounts receivable?

Current P1,666,666.67
Expected P3,125,000
Increase P1,458,333.33
ROI X 10%
OC P145,833.33

8. What is the future average investment in Accounts Receivable?

Receivable Turnover 360days ÷ 30days = 12

Receivable Balance P50,000,000 ÷ 12 = P4,166,666.67
Investments in Receivables P4,166,666.67 X .75 = P3,125,000

9. What is the marginal profit from increase sales?

Increase in Sales P10,000,000

Less: Increase in COS 7,500,000

Increase in Marginal Profit P 2,500,000

10. What is the net profit for the credit decision at hand?

Marginal Profit P2,500,000

Less: OC 145,833.33
Less: BDE 700,000
Net Profit P 1,654,166.67