FM8e- ch21 - 21 1 CHAPTER 21 Providing and Obtaining Credit...

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21 - 1 CHAPTER 21 Providing and Obtaining Credit Receivables management Credit policy Days sales outstanding (DSO) Aging schedules Payments pattern approach Cost of bank loans
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21 - 2 Cash Discounts: Lowers price. Attracts new customers and reduces DSO. Credit Period: How long to pay? Shorter period reduces DSO and average A/R, but it may discourage sales. Elements of Credit Policy (More…)
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21 - 3 Credit Standards: Tighter standards reduce bad debt losses, but may reduce sales. Fewer bad debts reduces DSO. Collection Policy: Tougher policy will reduce DSO, but may damage customer relationships.
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21 - 4 January $100 April $300 February 200 May 200 March 300 June 100 Terms of sale: Net 30 . Receivables Monitoring Assume the following sales estimates:
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21 - 5 30% pay on Day 10 (month of sale). 50% pay on Day 40 (month after sale). 20% pay on Day 70 (2 months after sale). Annual sales = 18,000 units @ $100/unit . 365-day year. Expected Collections
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21 - 6 DSO = 0.30(10) + 0.50(40) + 0.20(70) = 37 days . How does this compare with the firm’s credit period? What is the firm’s expected DSO and average daily sales (ADS)? ADS= = $4,931.51 per day . 18,000($100) 365
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21 - 7 What is the expected average accounts receivable level? How much of this amount must be financed if the profit margin is 25%? A/R = (DSO)(ADS) = 37($4,931.51) = $182,466 . 0.75($182,466) = $136,849 .
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21 - 8 A/R $182,466 Notes payable $136,849 Retained earnings 45,617 $182,466 If notes payable are used to finance the A/R investment, what does the firm’s balance sheet look like?
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21 - 9 = 0.12($136,849) = $16,422 . In addition, there is an opportunity cost of not having the use of the profit com- ponent of the receivables. If bank loans cost 12 percent, what is the annual dollar cost of carrying the receivables? Cost of carrying receivables
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21 - 10 Receivables are a function of average daily sales and days sales outstanding . State of the economy , competition within the industry, and the firm’s credit policy all influence a firm’s receivables level. What are some factors which influence a firm’s receivables level?
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21 - 11 The lower the profit margin , the higher the cost of carrying receivables, because a greater portion of each sales dollar must be financed. The higher the cost of financing , the higher the dollar cost. What are some factors which influence the dollar cost of carrying receivables?
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What would the receivables level be at the end of each month? Month
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FM8e- ch21 - 21 1 CHAPTER 21 Providing and Obtaining Credit...

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