2 nd SEMESTER

BWFF2033 FINANCIAL MANAGEMENT

2014/2015 (A142)

TUTORIAL 9 : MANAGEMENT OF ACCOUNTS RECEIVABLE

1.

The terms of sale generally include which of the following?

I.
cash discount
II.
credit period
III.
discount period
A.
B.
C.
D.

I and III only

II and III only
III and IV only
I, III and III

2.

Which one of the following will increase a firm's investment in accounts

receivables?
A.
a decrease in credit sales
B.
an increase in cash sales
C.
an increase in average daily credit sales
D.
a decrease in the number of days for which credit is granted

3.

Which one of the following statements is correct if you purchase an

item with credit terms of 1/5, net 15?
A.
B.
C.
D.

If you pay within 1 day, you will receive a 5 percent discount.

You pay within 5 days, you will receive a 1 percent
discount
If you do not pay within 15 days, you will be charged interest at a
1.5 percent monthly rate
If you pay within 15 days, you will receive a 1/5th percent
discount

4.

Jillian was recently hired by a major retail store. Her job is to determine
the probability that individual customers will fail to pay for their charge
sales. Jillian's job best relates to which one of the following?
A.
terms of sale
B.
credit analysis
C.
collection policy
D.
credit capacity

5.

Roger's Home Appliances offers credit to customers it deems worthy of

this privilege. To determine if a customer is worthy, the firm computes
a numerical value which is used to estimate the probability that the
customer will default if credit is granted to them. The process of
computing this numerical value is referred to as: .
A.
B.
C.
D.

credit scoring
credit capacity.
receipts assessment.
conditions for credit

2 nd SEMESTER

BWFF2033 FINANCIAL MANAGEMENT

2014/2015 (A142)

6.

Which one of the five Cs of credit refers to a firm's financial reserves?

A.
character
B.
capacity
C.
collateral
D.
capital

7.

Which of the followings are commonly used methods of analysing the creditworthiness of a
potential customer?
I.
II.
III.
IV.

Credit reports
Financial statements
Information provided by a bank
Payment history with similar firms

A.
B.
C.
D.

I and III only

II and IV only
I, II and III only
All of the above

PART B
1.

You purchase RM5,000 worth of supplies every 60 days and never take the trade discount of
2/10 net 60. How much could you save each year if you took the discount? (Assume 360
days per year)

2. Cape May Products currently sells 650 units a month at a price of RM59 a unit. The firm
believes it can increase its sales by an additional 125 units if it switches to a net 30 credit policy.
The variable cost per unit is RM38. What is the incremental cash inflow from the proposed credit
policy switch?

Incremental cash flow = ($59 - $38) (125) = $2,625

3.

Company ABC is considering a change in its cash-only sales policy. The new terms of sale
would be one month. The required return is 1.6 percent per month. Based on the following
information, what is the cost of switching to the new policy?
Price per unit (RM)
Cost per unit (RM)
Unit sales per month

Current policy
800
425
1,110
2

New policy
800
425
1,150

2 nd SEMESTER

BWFF2033 FINANCIAL MANAGEMENT

2014/2015 (A142)

Benefit of switching = ($800 - $425) (1,150 - 1,110) = $15,000

Cost of switching = $800 (1,110) + $425 (1,150 - 1,110) = $905,000
New policy NPV = $15,000/0.016 - $905,000 = $32,500

4.

Your firm currently sells 130 units a month at a price of RM210 a unit. You think you can
increase your sales by an additional 50 units if you switch to a net 30 credit policy. The
monthly interest rate is 0.6 percent and your variable cost per unit is RM125. What is the
Net Present Value (NPV) of the proposed credit policy switch?

5.

Clarify how the revenue and costs affects influence the decision to grant credit?
Revenue
The reason you would grant credit in the first place is so your customers can delay
paying you. This is convenient for your customers and will probably win customers
for you, but it is not so convenient for you and your bottom line, at least on an
immediate basis. Sales revenue from the sale you made to your customer will be
delayed for either the discount period or the credit period, or perhaps longer if the
customer is late in making the payment. The upside is that you may be able to raise
your prices if you offer credit.You have a trade-off. The possibility of more customers
and higher sales prices if you offer credit in exchange for possible delayed and late
payments. Unfortunately, it's hard to quantify this.
Cost
Whether you sell products or services you have to have them available and, in the
case of products, in stock, when a sale is made. When you extend credit, that means
paying for that product or service in order to have it in stock but not getting paid for
it immediately when it is purchased. Even though you will eventually get paid, your
business has to have enough cash flow to compensate for the delayed payment. In
addition, you lose any interest income you might have earned on that money.Again,
you have a trade-off. This time it is more customers and higher sale prices in
exchange for lost interest income and temporarily lower cash flow.

6.

Identify the THREE (3) components of any credit policy?

1. Terms of sale
2. Credit analysis
3. Collection policy