Solution manual managerial accounting and finance for hospitality operations CHAPTER 14

CHAPTER 14
CREDIT MANAGEMENT
I.

Questions
1.

The goal of accounts receivable management is to ensure that the firm’s
investment in accounts receivable is appropriate and contributes to shareholder
wealth maximization.

2.

Credit policy is a set of guidelines for extending credit to customers.

3.

Credit standards are criteria and guidelines used by the firm to determine which
customers get credit and how much credit each customer gets.
Credit terms specify the repayment terms required of all customers. Credit
terms include the cash discount, the cash discount period, and the credit period.

4.

Collection policy refers to the procedures used to collect late accounts.
Collection policy involves three steps: determining when to begin the collection
efforts, selecting the collection methods, and evaluating the potential tradeoffs
of increased collection expenditures.

5.

Credit analysis is the process of evaluating individual credit applicants. Credit
analysis involves three steps: obtaining information about the credit applicant,
analyzing the credit information, and making the credit decision.

6.

The five Cs of credit are character, capacity, capital, collateral, and conditions.
These factors are used to screen credit applicants.

II. True or False
1.
2.
3.
4.
5.

True
False
True
True
True

6.
7.
8.
9.
10.

False
False

False
True
True


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Solutions Manual - Managerial Accounting and Finance for Hospitality Operations

III. Practical Problems
PROBLEM 1
1.

The average collection period is 27 days.
0.3 (10 days) + 0.4 (30 days) + 0.3 (40 days) = 27 days

2.

The current receivables balance is P90,000.
Receivables = (ACP) (Sales / 360) = 27 (P1,200,000 / 360) = P90,000

PROBLEM 2
1.

The incremental change in receivables investment would be calculated as
follows:
Old credit policy :

(ACP) (Sales per day) (Variable cost ratio)
P2,000,000

(40)
(0.6) = P133,333.
360

New credit policy :

(ACP) (Sales per day) (Variable cost ratio)
P1,750,000
(30)
(0.6) = P87,500.
360

The incremental change in receivables is P87,500 – P133,333 = – P45,833.

2.

Sales
Less Discounts
Net sales
Production costs
Gross profit before credit costs
Credit related costs:
Cost of carrying receivables
Collection expenses
Bad debt losses
Gross profit
Tax (40%)
Net income

Income

Statement under
Current Policy
P2,000,000

Effect of
Change
P(250,000)

Income
Statement under
New Policy
P1,750,000

1,200,000
P 800,000

150,000
P(100,000)

1,050,000
P 700,000

16,000
100,000
P 684,000
273,600
P 410,400

5,500
65,000

P (29,500)
11,800
P (17,700)

10,500
35,000
P 654,500
261,800
P 392,700


Credit Management

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PROBLEM 3
1.

Substituting credit sales of P4,000,000 and accounts receivable of P500,000 in
the equation below,
Accounts receivable turnover

=

Net (credit) sales
Accounts receivable

the accounts receivable turnover is:
Accounts receivable turnover
2.

=

P4,000,000
500,000

=

8 times

Using the equation below,
Average collection period

=

365 days
Accounts receivable turnover

=

365
8

the average collection period is:
Average collection period

=

45.6 days

PROBLEM 4
Substituting bad debt expenses of P125,000 and credit sales of P5,000,000 in the
equation below,
Bad debt expenses
Bad debt loss ratio
=
Credit sales
the bad debt loss ratio is:
Bad debt loss ratio

=

P125,000
P5,000,000

=

0.025 or 2.5%

PROBLEM 5
1.

The accounts receivable turnover is calculated by dividing 365 days by the
average collection period of 25 days.
365
Accounts receivable turnover =
= 14.6 times
25

2.

The opportunity cost is calculated by multiplying the average investment in
accounts receivable by the required rate of return.
Opportunity cost of investment in accounts receivable =
=

P41,096 x 0.15
P6,164 (rounded)


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Solutions Manual - Managerial Accounting and Finance for Hospitality Operations