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102810-part3memo - Furthermore your sales discounts will...

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Memorandum To: CM 2 Management Team From: Leah Celani, Accountant Date: October 26, 2010 Subject: Effectiveness of Accounts Receivable Management After making the adjustments in accordance with your proposed adjustments due to sales discounts, I have concluded that your accounts receivable will become slightly less liquid. I found this by using the accounts receivable turnover ratio and average collection period ratio. Both ratios help measure the liquidity of your accounts receivable. By offering sales discounts, you are increasing your average collection period by .77 days (13.04 previously, 13.81 projected with new sales discounts).
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Unformatted text preview: Furthermore, your sales discounts will increase to 2% of total sales revenue previous sales discounts of .5% of sales revenue. Also, your allowance for doubtful accounts must increase to be proportional to your new accounts receivable balance, thus increasing your potential for loss of profit. Although, in comparison with your ratios, competitor Nortel’s accounts receivable turnover rate is higher than your new sales discount effect. Nortel’s average collection period is 40 days, so I would say that the new sales discounts do not affect your liquidity enough to not convert....
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