Providing and Obtaining Credit

1

• Chapter 22
• Part 2
• Providing and Obtaining Credit

2
MONITORING RECEIVABLES

• Three methods commonly used to monitor the _____
  of receivables are
• Days sales outstanding
• Aging schedule
• Uncollected balances pattern (also called the
  _____ approach)

3
End-Of-Quarter Receivables

• If we examine receivables quality on a quarterly
  basis, we begin with determining the
  end-of-quarter (EOQ) receivables balance.

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Example 10 pay in month of sale 30 pay
in 1st mo. after 40 pay in 2nd mo. after and
20 pay in 3rd mo. after

• Month Credit sales Receivables
• Jan 60
• Feb 60
• Mar 60 ?
• Apr 60
• May 90
• Jun 120 ?
• What are the end-of-quarter balances for
  receivables?

5
Calculating the DSO

• The days sales outstanding approach focuses on
  the average number of days until _____ is
  made.
• A shorter DSO implies a _____ quality of
  receivables.
• Calculate the DSO for each quarter (assume 91-day
  quarters).

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• The trend is that the DSO is getting _____, which
  implies that the quality of receivables is
  getting _____.
• However, the pattern of payments is unchanged
  (i.e., 10 pay in month of sale, 30 pay in 1st
  month after, etc.).
• DSO gives the _____ appearance that receivables
  quality has declined.

7
Calculating the Aging Schedule

• The aging schedule focuses on a breakdown of the
  receivables by _____.
• A higher percentage of older accounts suggests
  _____ quality.
• Calculate the aging schedule based on 30-day
  categories. (assume 30-day months)

8

• Acct age 1st Qtr 2nd Qtr
• 1-30 d 54 ( ?) 108 ( ?)
• 31-60 d 36 ( ?) 54 ( ?)
• 61-90 d 12 ( ?) 12 ( ?)
• Receivables 102 174

9

• Based on the aging schedule, the percentage of
  younger accounts is increasing, which implies
  that the quality of receivables is getting _____
• However, the pattern of payments is unchanged
  (i.e., 10 pay in month of sale, 30 pay in 1st
  month after, etc.).
• The aging schedule gives the _____ appearance
  that receivables quality has improved.

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Weaknesses of the DSO and Aging Schedule Methods

• Both the DSO method and the Aging Schedule method
  of estimating receivables quality are _____.
• If there is any pattern to _____ (i.e., rising,
  falling, seasonal, etc.), the DSO and Aging
  Schedule methods give misleading results.

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Calculating the Uncollected Balances Pattern

• The uncollected balances approach to measuring
  receivables quality focuses on the pattern of
  uncollected receivables relative to _____.
• An increase in the percentages suggests _____
  quality.
• Determine the uncollected balances breakdown for
  the same company.

12

• Remain. Remain.
• End of qtr. Rec / Sales
• Month Credit sales Recs Pattern
• Jan 60 ? ?
• Feb 60 ? ?
• Mar 60 _? ?
• 120
• Apr 60 ? ?
• May 90 ? ?
• Jun 120 __? ?
• 174

13

• Based on the uncollected balances pattern, the
  percentage of sales for each corresponding month
  is unchanged, which implies that the quality of
  receivables is _____.
• Since our problem is based on a constant payment
  pattern (i.e., 10 pay in month of sale, 30 pay
  in 1st month after, etc.), we know this is the
  correct conclusion.

14

• If the pattern had indicated an _____ in the
  uncollected balances percentages, this would
  imply a lower quality of receivables.
• For example
• 1st Qtr 20 60 90
• 2nd Qtr 27 78 92

15

• Note that the uncollected balances approach may
  be used regardless of the pattern of _____.

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In-Class Exercise

• Example A companys collection pattern is the
  following
• - 60 pay in month of sale
• - 30 pay in 1st mo. After
• - 10 pay in 2nd mo. After
• The companys sales are
• Jan 1000 April 2000
• Feb 1500 May 2000
• Mar 2000 June 1500

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• Determine the following for the company by
  quarter
• - aging schedule
• - DSO pattern
• - uncollected balances pattern

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In-Class Problem

• Determine the following measures of receivables
  quality for the company on the next slide
• - DSO pattern
• - aging schedule
• - uncollected balances pattern

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• EOQ
• Month Credit sales Receivables
• Jan 300 40
• Feb 300 80
• Mar 300 120 240
• Apr 300 50
• May 450 130
• Jun 600 320 500

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• The DSO is rising, which indicates a(n) _____ in
  the quality of receivables.
• The aging schedule shows a smaller percentage of
  older accounts, which indicates a(n) _____ in the
  quality of receivables.
• Neither of these measures, however, can be
  trusted in this case since _____ are not constant.

21

• The uncollected balances results, however, show a
  rise in the percentage of each months sales
  uncollected at the end of the quarter.
• This indicates a(n) _____ in the quality of
  receivables.