What are the three components of a credit policy? Does the company’s current credit policy satisfy these three components? What are the effective annual costs for the two proposed credit policy alternatives? If the average borrowing rate for the company’s customers is 15%, will these credit policies be attractive to these customers?
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|
||||||
Cash |
10,000 |
Accounts payable |
$15,000 |
|||
Accounts receivable |
70,548 |
Notes payable |
35,548 |
|||
Inventory |
20,000 |
Current liabilities |
$50,548 |
|||
Current assets |
$100,548 |
Long-term debt |
200,000 |
|||
Fixed assets |
500,000 |
Equity |
$350,000 |
|||
Total assets |
$600,548 |
|
$600,548 |
Questions:
- What are the three components of a credit policy? Does the company’s current credit policy satisfy these three components?
- What are the effective annual costs for the two proposed credit policy alternatives? If the average borrowing rate for the company’s customers is 15%, will these credit policies be attractive to these customers?
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- ABC Distributing Company sells small appliances to hardware stores. The President of the Company thinking about changing the credit policies offered by the firm to attract customers away from competitors. The current policy calls for a 1/10, net 30, and the new policy would call for a 3/10, net 50. Currently 40% of the customers are taking the discount, and it is anticipated that this number would go up to 50% with the new discount policy. It is further anticipated that annual sales would increase from a level of $200,000 to $250,000 because of the change in the cash discount policy. The increased sales would also affect the inventory level. The average inventory carried by Company is based on a determination of an EOQ. Assume unit sales of small appliances will increase from 20,000 to 25,000 unit. The ordering cost for each is $100 and the carrying cost is based on EOQ/2. Each unit in inventory has an average cost of $6.50. CoGS is equal to 65% of net sales; general and adm. expenses…Uncle Benson SuperMart has been one of the fast growing Caribbean firms for the last five years in terms of sales and profits. The firm has consistently maintained a sales level and profit level above the average for the wholesale industry. Mr. Benson has asked you to explain possible reasons why the firm is having difficulty meeting its payroll and it accounts payable. What would you tell Mr. Benson? Required Explain to Mr. Benson possible reasons why his firm is having difficulty meeting its payroll and it accounts payable.Global Reach, Inc., is considering opening a new warehouse to serve the Southwest region. Darnell Moore, controller for Global Reach, has been reading about the advantages of foreign trade zones. He wonders if locating in one would be of benefit to his company, which imports about 90 percent of its merchandise (e.g., chess sets from the Philippines, jewelry from Thailand, pottery from Mexico, etc.). Darnell estimates that the new warehouse will store imported merchandise costing about 16.78 million per year. Inventory shrinkage at the warehouse (due to breakage and mishandling) is about 8 percent of the total. The average tariff rate on these imports is 5.5 percent. Required: 1. If Global Reach locates the warehouse in a foreign trade zone, how much will be saved in tariffs? Why? (Round your answer to the nearest dollar.) 2. Suppose that, on average, the merchandise stays in a Global Reach warehouse for nine months before shipment to retailers. Carrying cost for Global Reach is 6 percent per year. If Global Reach locates the warehouse in a foreign trade zone, how much will be saved in carrying costs? What will the total tariff-related savings be? (Round your answers to the nearest dollar.) 3. Suppose that the shifting economic situation leads to a new tariff rate of 13 percent, and a new carrying cost of 6.5 percent per year. To combat these increases, Global Reach has instituted a total quality program emphasizing reducing shrinkage. The new shrinkage rate is 7 percent. Given this new information, if Global Reach locates the warehouse in a foreign trade zone, how much will be saved in carrying costs? What will the total tariff-related savings be? (Round your answers to the nearest dollar.)
- Costco is the largest chain of membership warehouse clubs in the world based on sales volume, and it is the fifth largest general retailer in the United States. Costco focuses on selling products at low prices, often at a very high volume. These goods are usually bulk-packaged and marketed primarily to large families and businesses. Costco became the first company to grow from zero to 3 billion in sales in less than six years. In a recent fiscal year, Costcos sales totaled 76.3 billion, a 29.3 percent increase from 2006, and its net income reached 1.30 billion, an 18.1 percent increase from 2006. This information, and much more, can be derived from the financial statements that merchandising firms such as Costco prepare on a regular basis to provide shareholders and other interested parties information about the companys activities and financial performance. 1. What type of information would a classified income statement provide to shareholders and other interested parties? 2. What type of information would a classified balance sheet provide to shareholders and other interested parties? Why would this information be important for calculating the working capital and the current ratio, for example?Ethics and Revenue Recognition Alan Spalding is CEO of a large appliance wholesaler. Alan is under pressure from Wall Street Analysts to meet his aggressive sales revenue growth projections. Unfortunately, near the end of the year he realizes that sales must dramatically improve if his projections are going to be met. To accomplish this objective, he orders his sales force to contact their largest customers and offer them price discounts if they buy by the end of the year. Alan also offered to deliver the merchandise to a third-party warehouse with whom the customers could arrange delivery when the merchandise was needed. Required: Do you believe that revenue from these sales should be recognized in the current year? Why or why not?Percentage of Credit Sales Method Ruby Red manufactures, markets, and distributes citrus flavored soft drinks across the globe. Ruby Red hired a collection agency in 2018 to increase collection rates from customers. As a result, Ruby estimates that only 2% of its 2019 credit sales will be written off, compared to the 4% of 2018s credit sales that were estimated to be uncollectible. At December 31, 2019, Ruby Red has a $12,800 credit balance in its allowance for doubtful accounts and credit sales of $1,570,000. Required: Use the percentage of credit sales method to calculate the bad debt expense.