Instructions Calculate the nies. Commer 410 Receivables: Reporting and Analysis
ID: 2509950 • Letter: I
Question
Instructions Calculate the nies. Commer 410 Receivables: Reporting and Analysis CHAPTER & Explain the impact of ransactiorns on ratios: eceipt of cash from 0 8, 9) P8-7B The president of Castle Enterprises Ltd., Nicole Castle, is considering the impact that certain transactions have on its receivables turnover and average collection period ratios. Prior to the following transactions, Castle's receivables turnover was 6 times, and its average collection period was 61 days Problen Average Receivables Collection Period (6x)(61 days) Visit the boo panion site t Turnover Transaction 1. Recorded sales on account $100,000. 2. Collected $25,000 owing from customers. 3. Recorded bad debts expense for the year $7,500, using the allowance method. customers' accounts. uncollectible. 4. Recorded sales returns of $1,500 and credited the omp 5. Wrote off a $2,500 account from a customer as CP8 Mul Instructions (a) Complete the table, indicating whether each transaction will increase (D). decrease (D), or have no effect (NE) on the ratios. panies and noticed that they had recorded a loss on sale of receivables. She would like you to explain why companies sell their receivables. (b) Nicole was reading through the financial statements for some publicly traded com- CashExplanation / Answer
Answer 1 is provided in table below, with reasoning:
Answer 2
The process of selling receivables is known as factoring. The company may sell their receivables for a variety of reasons and few of them are listed below:
1. Improvement of cash flow - The companies selll their receivables to factoring agencies (at a discount though i.e. loss on sale of receivables) to receive cash immediately. This cash improves the liquidity and cash flow of the organisation.
2. Less complicated - There are other means of improving the liquidity/cash requirements but often those process is lengthy with lots of paperwork and time consuming, depending on the nature of business and financial stability of the organisation. Receivables factoring comes easy in such situations.
3. Business Growth - Many business run with low capital or low liquid funds and hence in order to grow and expand they may need cash immediately to tap into new markets and cotracts to meet their operating expenses and manufacturing costs. Selling receivables immediately and not waiting for the entire credit period to receive money, serves their purpose well.
4. Outsourcing v/s Factoring - Many business houses have to set up receivables management department to collect thouse outstanding balances, sending reminders, notices, confirmations etc. When such costs are not less, factoring comes as a good alternative.
There might be some other strategic or business decisions which make a business sell their receivables at a loss. This loss can be broken into interest cost (credit period), opportunity costs (deploying the funds received into a new project or contract to generate higher revenues), and compensating costs (avoiding the costs for set up of a collections department)
Thanks.
Sl Case Receivables Turnover = Credit Sales / Receivables Reason Avg Collection Period = Receivables / Credit Sales * 365 Reason 1 Recorded Sales on account $100,000 D = (6X+100000)/(X+100000)denonimator has increased comparatively I = (X+100000)/(6X+100000)*365
numerator has increased comparatively 2 Collected $25000 owing from customers I = (6X-25000)/(X-25000)
denonimator has decreased comparatively D = (X-25000)/(6X-25000)*365
numerator has decreased comparatively 3 Recorded bad debts expense $7500 as provision NE Provision for bad and doubtful debts is not considered for calculation of average receivables NE Provision for bad and doubtful debts is not considered for calculation of average receivables 4 Recorded Sales returns of $1500 I = (6X-1500)/(X-1500)
denonimator has decreased comparatively D = (X-1500)/(6X-1500)*365
numerator has decreased comparatively 5 Wrote off $2500 I = 6X/(X-2500)
denonimator has decreased D = (X-2500)/6X *365
numerator has decreased