Question

Accounts receivable

Effective credit management involves establishing credit standards for extending credit to customers, determining the company’s terms of credit, and setting up procedures for invoicing and collecting past-due accounts.

The following statement refers to a credit management policy. Select the best term to complete the sentence.

The conditions of the credit sale, including cash discounts and due dates, are indicated by the company’s credit standards   .

Consider the case of Mammoth Pictures Inc.:

Mammoth Pictures Inc.’s CFO has decided to take a closer look at the company’s credit policy. Mammoth Pictures Inc. has annual sales of $384.4 million, and it currently has an accounts receivable balance of $45.9 million. The first step in analyzing the firm’s credit policy is to determine its days sales outstanding (DSO).

Based on this information, Mammoth Pictures Inc.’s DSO is43.6 days   . (Note: Use 365 days as the length of a year in all calculations. Do not round intermediate calculations. Round your answer to one decimal place.)

1. The average DSO for Mammoth Pictures Inc.’s industry is 53.4 days. Assuming that its sales stayed the same, what would be Mammoth Pictures Inc.’s receivables balance if it maintained the industry average DSO?     (Note: Do not round intermediate calculations. Round your answer to the nearest whole dollar.)

Mammoth Pictures Inc.’s CFO thinks that the company has not done a very good job of enforcing its credit policy. The CFO believes that if the company were to better enforce its credit policy, it would reduce its DSO to 30 days; however, this will cause Mammoth Pictures Inc. to lose 5% of its sales revenue. What would Mammoth Pictures Inc.’s expected accounts receivables balance be if it decides to tighten its credit policy? (Note: Do not round intermediate calculations. Round your answer to the nearest whole dollar.)

$28,514,055

$36,017,754

$27,013,316

$30,014,795

Answer 1

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