Reference no: EM131698615

Question: Analysis of Accounts Receivable and Credit Policy Based on customer feedback, Ted Pendleton, manager of Gray Company, which produces photo supplies, decided to grant more liberal credit terms. Ted chose to allow customers to have 60 days before full payment of the account was required. From 2008 through 2010, Gray's credit policy for sales on account was 2/10, n/30. In 2011, the policy of 2/10, n/60 became effective. By the end of 2012, Gray was beginning to experience cash flow problems. Although sales were strong, collections were sluggish, and the company was having a difficult time meeting its shortterm obligations. Ted noted that the cash flow problems materialized after the credit policy was changed and wondered if there was a connection. To help assess the situation, he gathered the following data pertaining to the collection of accounts receivable (balances are end-of-year balances; the 2008 balance was the same as that in 2007):

                                       2008               2009                2010               2011                2012

Accounts receivable         $100,000         $120,000          $100,000          $150,000         $190,000

Net credit sales                 500,000          600,000            510,000           510,000           520,000

Required: 1. Compute the number of times that receivables turned over per year for each of the five years. Also express the turnover in days instead of times per year.

2. Conceptual Connection: Based on your computation in Requirement 1, evaluate the effect of the new credit policy. Include in this assessment the impact on the company's cash inflows.

3. Conceptual Connection: Assume that the industry has an average receivables turnover of six times per year. If this knowledge had been available in 2010, along with knowledge of the company's receivable turnover rate, do you think that Ted Pendleton would have liberalized his company's credit policy?