Reference no: EM13924297
Monitoring Accounts Receivable
Upon graduation from NAU with your business degree, you took a job as a Management Consultant.
The Russ Fogler Company has hired your consulting firm to evaluate their receivables management system.
They would like you to analyze their receivables situation for the first year as well as for the first two quarters in business, including DSO's, aging schedules and uncollected balances schedules.
In addition, Mr. Fogler has expressed concern about some receivables issues.
He is concerned that the tight credit market will affect their ability to finance receivables with notes payables and wants to determine how much of the receivables need to be financed.
The Russ Fogler Company, a small manufacturer of cordless telephones, began operations on October 1, 2014.
Its credit sales for the first 6 months of operations were as follows:
Month
Credit Sales
October
$50,000
November
100,000
December
105,000
January
120,000
February
140,000
March
160,000
1. Based on the pro forma financials, Fogler's total sales forecast for the first full year of operations is 28,000 phones at an average sales price of $50 per phone. As a first approximation, they assumed that 20 percent of the firm's customers will pay 10 days after the sale, 60 percent will pay on the 30th day, and 20 percent will pay on the 60th day.
a. What is the firm's projected days sales outstanding (DSO)?
b. What are the projected average daily sales? (Use a 365-day year.)
c. What is Fogler's projected average receivables level?
d. If Fogler is estimating a gross profit margin, or contribution margin, of 40 percent, how much of the receivables balance must actually be financed? What would Fogler's balance sheet figures for accounts receivable, notes payable and retained earnings be at the end of the year if notes payable are used to finance the investment in receivables?
e. If short-term bank loans cost 9 percent, what is their projected annual cost of carrying the receivables?
2. Fogler would like you to determine and explain the primary factors that influence the level of receivables outstanding. Additionally, they would like to know what factors influence the dollar cost of carrying the receivables.
3. Throughout the first six months of business, the firm's credit customers maintained constant payment patterns: 20% paid in the month of sale, 40% paid in the month following the sale, and 40% paid in the second month following the sale. Refer to the monthly sales in the table above.
a. What was Fogler's receivables balance at the end of December and at the end of March?
b. Assume 90 days per calendar quarter. What were the average daily sales (ADS) and days sales outstanding (DSO) for the last quarter of 2014 and first quarter of 2015? What were the ADS and DSO for the first six months of business?
c. Does the DSO indicate that the firm's customers have changed their payment behavior from the last quarter of 2014 to the first quarter of 2015? Is DSO a good management tool in this situation? Why or why not?
d. How does this actual DSO compare to what Fogler anticipated based on approximations for the year from part 1.a. above? Why did this happen and what can Fogler do to improve their actual DSO?
4. Fogler would like to see the aging and uncollected balances schedules and compare their results in order to evaluate customer payment patterns.
a. Construct aging schedules as of the end of December and the end of March.
b. Explain what these aging schedules indicate about the customers' payment patterns from one quarter to the next.
c. Construct the uncollected balances schedule as of the end of December and the end of March.
d. Explain what these uncollected balances schedules indicate about the customers' payment patterns from one quarter to the next.
e. Which of these schedules properly measures customers' payment patterns?
If you needed to choose one number to monitor from either the aging or uncollected balances schedules, which number would best describe the customer payment patterns?
Explain your answers.