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Chapter 3: 11BP_e (page 221)

Route Canal Shipping Company has the following schedule for aging of accounts receivable:

e. What additional information does the aging schedule bring to the company that the average collection period may not show?

Short Answer

Expert verified

The aging schedule helps in evaluating the credit policy and forecasting cash inflows.

Step by step solution

01

Meaning of aging schedule

The aging schedule depicts the organization鈥檚 accounts receivables and the due date of these receivables. This schedule helps an organization in evaluating it its customers are paying their debt on time.

02

Explanation of requirement

The aging schedule helps the organization evaluate the efficiency of its credit policy. This schedule also helps an organization in forecasting its cash inflows.

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Most popular questions from this chapter

Henderson Office Supply is considering a more liberal credit policy to increase sales, but expects that 9 percent of the new accounts will be uncollectible. Collection costs are 6 percent of new sales, production and selling costs are 74 percent, and accounts receivable turnover is four times. Assume income taxes of 20 percent and an increase in sales of $65,000. No other asset build-up will be required to service the new accounts.

e. Given the income determined in part b and the investment determined in part d, should Henderson extend more liberal credit terms?

Mervyn鈥檚 Fine Fashions has an average collection period of 50 days. The accounts receivable balance is $95,000. What is the value of its credit sales?

Lear Inc. has \(840,000 in current assets, \)370,000 of which are considered permanent current assets. In addition, the firm has \(640,000 invested in fixed assets.

b. As an alternative, Lear might wish to finance all fixed assets and permanent current assets plus half of its temporary current assets with long-term financing and the balance with short-term financing. The same interest rates apply as in part a. Earnings before interest and taxes will be \)240,000. What will be Lear鈥檚 earnings after taxes? The tax rate is 30 percent.

Henderson Office Supply is considering a more liberal credit policy to increase sales, but expects that 9 percent of the new accounts will be uncollectible. Collection costs are 6 percent of new sales, production and selling costs are 74 percent, and accounts receivable turnover is four times. Assume income taxes of 20 percent and an increase in sales of $65,000. No other asset build-up will be required to service the new accounts.

c. Should Henderson liberalize credit if a 16 percent after-tax return on investment is required?

Using the expectations hypothesis theory for the term structure of interest rates, determine the expected return for securities with maturities of two, three, and four years based on the following data. Do an analysis similar to that in the right-hand portion of Table 6-6.

1-year T bill at the beginning of year 1

5%

1-year T bill at the beginning of year 2

8%

1-year T bill at the beginning of year 3

7%

1-year T bill at the beginning of year 4

10%
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