Question

7. Kruger Industrial Smoothing Inc. sells on terms of 2/15, net 40. Total annual sales are $9,400,000. 25% of the customers pay on the 15th day and take discounts, 30% pay in 40 days, 35% pay in 50 days and the remaining 10% of their customers pay, on average, 70 days after their purchases.

        a.   What is Kruger’s accounts receivable balance? Round to the nearest dollar.

b.   The credit manager of Kruger is implementing stricter credit and collections policies and is striving for the following scenario: 40% of customers paying in 15 days taking discounts, 45% paying in 40 days and the remaining paying in 50 days. How much cash will be freed up if Kruger’s CFO can make this happen? Round to the nearest dollar.

      c.   Why is freeing up cash like this important to any given company?

       

Answer 1

a)	Average collection period = 25%*15+30%*40+35%*50+10%*70 =	40.25	days
	Accounts receivable balance = 9400000*40.25/365 =	$    10,36,575
b)	Average collection period = 40%*15+45%*40+15%*50 =	31.50	days
	Accounts receivable balance = 9400000*31.50/365 =	$      8,11,233
	Cash freed up	$      2,25,342
c)	When cash is freed up, the following advantages follow:
	*Liquidity position would improve
	*Short term borrowings can be reduced
	*Financing costs can be reduced