Credit standards, Managerial Accounting

Assignment Help:

This variable deals along with the granting of credit. On one great all the customers are granted credit and conversely, none of them are granted credit irrespective of their credit rating, but in nowadays competitive environment it is impossible. Usually liberal credit standards initiate increased sales accompanied through higher incidence of bad debts, tying of funds in accounts receivable and raised cost of credit collection. Tight or stiff credit standards lead to reduced sales, lower incidence of bad debts, reduced investment in accounts receivable and reduced collection cost.

The quantitative consequence of relaxing the credit standards on profit can be estimated through the equation 1:

? NP = [? S (1 - V ) - ? S bn ](1 - t) - k?I          ............(1)

Here

? NP =          Change in net profit

? S  =          Increase in sales

V     =          Ratio of variable cost to sales

bn    =          Bad debt ratio on new sales

T     =          Tax rate

K     =          Cost of capital

? I   =          raise in receivable investment

 ? I  = (? S/360) . ACP . V

(? S/360) = Average daily change (increase in sales)

 ACP = Average collection period

Here let us see how each element of equation 1 affects net profit. ? S (1-V) shows the raise in gross incremental profit, because of relaxed credit standard and for this reason gross profit, is explained as Sales-Variable cost. ? Sbn computes the bad debts upon incremental sales. The first part of the equation [ ? S (1-V) - ? Sbn] (1-t) shows the post tax operating profit arising from of incremental sales and k ? I measures the post tax opportunity cost of capital locked in extra investment on account of relaxed credit standards. The pre-tax operating profit is multiplied via (1-t) so as to get past tax operating profit.


Related Discussions:- Credit standards

Labor standard, Describe the impact of different types of standards on moti...

Describe the impact of different types of standards on motivations and specifically,the likely effect on motivation of adopting the labor standard recommended?

Bridge loans, Bridge loans are obtainable from the banks and financial inst...

Bridge loans are obtainable from the banks and financial institutions while the source and timing of the funds to be raised is identified along with certainty. While there is a tim

Explain the quick ratio - liquidity ratios, Quick ratio Meaning: this...

Quick ratio Meaning: this ratio establishes a relationship among quick assets and current liabilities Objective: the objective of commuting this ratio is to calculate th

Need help, Pantheon Company has prepared the following forecasts of monthly...

Pantheon Company has prepared the following forecasts of monthly sales: July August September October Sales (in units) 4,300 5,100 3,800 2,500 Pantheon has decided that the num

Inventory control decisions, INVENTORY CONTROL DECISIONS Factories, wor...

INVENTORY CONTROL DECISIONS Factories, workshops, engineering departments handle raw materials used in the manufacture of products. The main objectives in handling these materi

Multiple products, differentiate between multiple product , selling cots an...

differentiate between multiple product , selling cots and margin management

Calculate earnings per share, EMERALD LTD is planning an expansion programm...

EMERALD LTD is planning an expansion programme,which will require Rs 30 crores & can be funded through one of the following 1.issue further equity share of Rs 100 each at par.

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd