Financial Management 1 Frederick Alfred D.

Abao, CPA
Gordon College Working Capital Management

Management of Accounts Receivable

Problem 1
Abao Corporation is planning to introduce changes in its collection procedures. The new procedures are expected to make the
collection period longer by 10 days, although there will be no change in bad debts.

For the coming year, Abao Corporation’s budgeted sales is P32,400,000 or P90,000 per day. Short-term interest rates are expected to
average at 9% per annum.
Required:
1. Compute for the increase (decrease) in the average accounts receivable balance if the changes in the collection procedures
are adapted.
2. How much minimum savings in collection costs the company must earn to make the changes beneficial?

Problem 2
Pinky Company is planning to change its credit policy. The proposed change is expected to:
 Shorten the collection period from 50 days to 30 days.
 Increase the ratio of cash sales to total sales from 20% to 30%.
 Decrease total sales by 10%.
Projected sales for the coming year is P40M.
Compute for the peso impact on the average accounts receivable balance if proposed changes are implemented.

Problem 3
Mailene Inc. has the following data:
Selling price P70
Variable cost per unit P45
Annual credit sales – units 50,400
Collection period 30 days
Rate of return 20%
Mailene is considering easing its credit standards. If it does, sales will increase by 25%; collection period will increase to 45 days; bad
debts losses are anticipated to be 4% of the incremental sales; and collection costs will increase by P31,645.
Required:
Compute for the net benefit/(loss) for Mailene if proposed relaxation in credit standards is implemented.

Problem 4
Fred Company’s total sales for the year is P6,400,000, 10% of which is cash sales. The variable cost ratio is 60%. Starting next year,
Fred will relax its credit standards. The relaxation in credit standards is expected to cause the following changes:
 Total credit sales will increase by 20%.
 The collection period for incremental sales is 60 days. The payment behavior of the existing customers will not change.
The variable cost ratio, even for the incremental sales, will be the same as in the past. The cost of borrowing is estimated at 25% per
year. The company uses 360 days in a year in all its computations.
Required:
Compute for the company’s expected benefit (loss) from the planned relaxation in credit policy.