E. Explain how each of the following actions is likely to affect each of accounts receivable, sales, and profit. In your answer, explain whether the action will increase or decrease each variable or have an indeterminate effect.
a) The firm loosens its credit standards.
b) The terms of trade are changed from 3/10, net 30 to 2/10, net 30.
c) The terms of trade are changed from 3/10, net 40 to 3/10, net 30.
d) The credit manager gets tough with past due accounts.
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a. The firm loosens its credit standards:
Sales: increase due to lax credit policies (which will equal more sales)
AR: will increase because credit is easier to get with the company. More people will take more time to pay, or won't pay at all (bad debts will also increase).
Profit: Decrease, because more accounts will go uncollected. ...
The solution provides the exact calculations and explanations for how each credit term change is likely to affect each of accounts receivable, sales, and profit. Also explained is if the action will increase or decrease each variable or have an indeterminate effect.
accounting review help
- The essentials of record-keeping.
- Preparation of simple financial statements.
- Balance sheet: Asset and Liability measurement and recognition.
- Income Statement: Revenue and expense recognition and measurement
- Account receivable; advances form customers; revenue recognition.
- Measuring and reporting working capital accounts: cash; prepayments; inventory; accounts payable; warranties; restructuring charges.
- Cost Behavior, decision making and simple budgeting: fixed and variable costs; relevant costs for decision making; cost-volume-profit analysis.
- Noncurrent assets: recognition and measurement of noncurrent assets; tangible and intangible assets; depreciation; impairment testing.
- Introduction to investments: introduction to investment in debt and equity securities; marketable securities and equity method investment.
- Statement of cash flows: preparing and understanding a statement of cash flows.
- Bonds: liabilities-bonds.
- Performance measurement: introduction to financial statement analysis; assessing firm level performance and an introduction to FSA.View Full Posting Details