Refer to the opening feature about Sword & Plough. Assume that Emily and Betsy report current annual sales at approximately $1 million and prepare the following income statement.

SWORD & PLOUGH

Income Statement

For Year Ended January 31, 2016

Net sales ................................................ $1,000,000

Cost of sales ............................................ 610,000

Expenses (other than cost of sales) ................. 200,000

Net income ............................................$ 190,000

Emily and Betsy sell to individuals and retailers, ranging from small shops to large chains. Assume that they currently offer credit terms of 1/15, n/60, and ship FOB destination. To improve their cash flow, they are considering changing credit terms to 3/10, n/30. In addition, they propose to change shipping terms to FOB shipping point. They expect that the increase in discount rate will increase net sales by 9%, but the gross margin ratio (and ratio of cost of sales divided by net sales) is expected to remain unchanged. They also expect that delivery expenses will be zero under this proposal; thus, expenses other than cost of sales are expected to increase only 6%.

Required

1. Prepare a forecasted income statement for the year ended January 31, 2017, based on the proposal.

2. Based on the forecasted income statement alone (from your part 1 solution), do you recommend that Emily and Betsy implement the new sales policies? Explain.

3. What else should Emily and Betsy consider before deciding whether or not to implement the new policies? Explain.