A.    Prepare a table setting out the average credit/collection costs both in total dollars and as a percentage of net credit sales.
B.    Prepare a table to show the cost of interest earnings forgone as a result of not being able to invest money which would become available if credit cards were introduced.
C.    Prepare a table setting out the total cost in dollars and in percentage of credit sales of credit and collection costs of carrying accounts receivable.
D.    Based on the analyses above, would you recommend that Felicity’s Flowers Pty Ltd offers credit card facilities to its customers rather than selling on credit? Would your recommendation be the same if non-financial factors were considered? Explain.

Felicity’s Flowers Pty Ltd has been operating profitably for a number of years and has always sold merchandise on the basis of cash or credit. Felicity, the proprietor, had always resisted accepting credit cards as payment, as she has always had a dislike for them as a result of family upbringing where she was constantly reminded of the dangers of using personal credit cards. Although profits of the business have been satisfactory, they are declining, and it is becoming clear that sales are being lost because credit card facilities are not available to potential customers. Major competitors have been accepting credit cards for many years and appear to have an expanding customer base. Felicity is also mindful of the costs that are associated with offering credit card facilities.

Daniel Wiseman, an accountant and personal friend, recently pointed out to Felicity that selling goods on credit also incurred considerable costs which were often overlooked. Examples of such costs include credit assessment of potential customers, invoicing and record keeping, bad debts, and credit collection costs. He pointed out that offering credit card facilities in some cases could be more financially attractive than selling on credit. He volunteered to prepare data to enable a comparative analysis to be made of the costs of selling on credit and carrying accounts receivable and the costs of accepting credit cards.

After analysing the past 3 years of accounting records, Daniel produced the following figures based on a 3-year average of recorded results:

Annual credit sales Cost of accounting for accounts receivable (part-time clerk) Collection costs paid to agencies

$1 350 000 19 000 8 000

Other direct financial costs identified and expressed as a percentage of credit sales were:

Invoicing and collection costs Credit assessment of potential customers Bad debts

0.54% 0.10% 1.25%

Daniel also established that credit card issuers impose, on average, a charge of 4% of credit sales and the cash is received approximately 5 days from the date of sale. The average monthly accounts receivable balance is $40 000, and any surplus cash arising from the use of credit cards (ignoring the 5 days delay period) can be invested at 7% p.a.