98 108 november 52 days 177 september 198 198 august

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Unformatted text preview: DATA $ 54 February 60 60 102 April 60 90 120 174 July 120 90 60 132 October 60 60 60 102 52 days 102 December $1.98 108 November 52 days 177 September $1.98 198 August DSOc (7) 129 June ADSc (6) 102 May DSOb (5) 90 March ADSa (4) aADS Average daily sales. Days sales outstanding. cWe assume each quarter is 91 days long. bDSO 2.97 59 2.47 70 2.97 44 2.64 50 1.98 52 2.47 41 27-6 Chapter 27 Providing and Obtaining Credit $2,473 70 days. (For the entire year, sales are $900,000; ADS $2,466, and DSO at year-end 41 days. These last two figures are shown at the bottom of the last two columns.) The data in Table 27-1 illustrate two major points. First, fluctuating sales lead to changes in the DSO, which suggests that customers are paying faster or slower, even though we know that customers’ payment patterns are not changing at all. The rising monthly sales trend causes the calculated DSO to rise, whereas falling sales (as in the third quarter) cause the calculated DSO to fall, even though nothing is changing with regard to when customers actually pay. Second, we see that the DSO depends on an averaging procedure, but regardless of whether quarterly, semiannual, or annual data are used, the DSO is still unstable even though payment patterns are not changing. Therefore, it is difficult to use the DSO as a monitoring device if the firm’s sales exhibit seasonal or cyclical patterns. Seasonal or cyclical variations also make it difficult to interpret aging schedules. Table 27-2 contains Hanover’s aging schedules at the end of each quarter of 2004. At the end of June, Table 27-1 shows that Hanover’s receivables balance was $174,000. Eighty percent of April’s $60,000 of sales had been collected, 40 percent of May’s $90,000 of sales had been collected, and 10 percent of June’s $120,000 of sales had been collected. Thus, the end-of-June receivables balance consisted of 0.2($60,000) $12,000 of April sales, 0.6($90,000) $54,000 of May sales, and 0.9($120,000) $108,000 of June sales. Note again that Hanover’s customers had not changed their payment patterns. However, rising sales during the second quarter created the impression of faster payments when judged by the percentage aging schedule, and falling sales after July created the opposite appearance. Thus, neither the DSO nor the aging schedule provides an accurate picture of customers’ payment patterns if sales fluctuate during the year or are trending up or down. With this background, we can now examine another basic tool, the uncollected balances schedule, as shown in Table 27-3. At the end of each quarter, the dollar amount of receivables remaining from each of the three month’s sales is divided by that month’s sales to obtain three receivables-to-sales ratios. For example, at the end of the first quarter $12,000 of the $60,000 January sales, or 20 percent, are still outstanding; 60 percent of February sales are still out; and 90 percent of March sales are uncollected. Exactly the same situation is revealed at the end of each of the next three quarters. Thus, Table 27-3 shows that Hanover’s customers’ payment behavior has remained constant. Recall that at the beginning of the example we assumed the existence of a constant payments pattern. In a normal situation, the firm’s customers’ payments pattern would probably vary somewhat over time. Such variations would be shown in the last column of the uncollected balances schedule. For example, suppose cus- Table 27-2 Age of Accounts (Days) Hanover Company: Quarterly Aging Schedules for 2004 (Thousands of Dollars) VALUE AND PERCENTAGE OF TOTAL ACCOUNTS RECEIVABLE AT THE END OF EACH QUARTER: March 31 June 30 0–30 $ 54 36 35 54 31 54 41 36 35 61–90 12 12 12 7 24 18 12 12 100% $108 $174 62% 100% $ 54 $132 41% December 31 31–60 $102 53% September 30 100% $ 54 $102 53% 100% The Payments Pattern Approach to Monitoring Receivables Table 27-3 27-7 Hanover Company: Quarterly Uncollected Balances Schedules for 2004 (Thousands of Dollars) Monthly Sales Remaining Receivables at End of Quarter Remaining Receivables as Percent of Month’s Sales at End of Quarter $ 60 $ 12 20% February 60 36 March 60 54 Quarter Quarter 1: January 60 90 $102 170% 20% Quarter 2: April $ 60 $ 12 May 90 54 June 120 108 90 $174 170% 60 Quarter 3: July $120 $ 24 August 90 54 60 20% September 60 54 90 $132 170% 20% Quarter 4: October $ 60 $ 12 November 60 36 December 60 60 54 90 $102 170% tomers began to pay their accounts slower in the second quarter. That might cause the second quarter uncollected balances schedule to look like this (in thousands of dollars): Quarter 2, 2004 Sales New Remaining Receivables New Receivables/Sales April $ 60 $ 16 27% May 90 70 June 120 110 92 $196 197% 78 We see that the receivables-to-sales ratios are now higher than in the corresponding months of the first quarter. This causes the total uncollected balances percentage to rise from 170 to 197 percent, which, in turn, should alert Hanover’s managers that customers are paying slower than they did ea...
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