A restaurant has been in operation for the past five years and has successfully increased its sales revenue each year. One of the reasons is that in the third year the owner began extending credit to local businesspeople who regularly used the restaurant. They were allowed to sign their sales checks and were then sent an invoice at each month-end. The owner is concerned that this credit policy may have led to increases in losses from bad debts (uncollectable accounts receivable) that were not justified by increases in sales revenue. The restaurant operates at a 60% gross margin ratio, and other operating expenses (not including bad debts) are 50%

of sales revenue. Following are the credit sales revenue and bad debt figures for the past five years:

In a columnar schedule for each year, record the credit sales revenue, cost of sales, gross margin, and operating expenses. In addition, in a second columnar schedule for each year, record income before bad debts (uncollectable accounts receivable), bad debts, operating income, and the bad debts as a percentage of credit sales revenue. Write a brief report to the owner with particular reference to control over bad debt losses and the restaurant’s credit policy.LO1

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Year Credit Sales Revenue Bad Debts 12345 $160,000 $ 960 180,000 900 3 240,000 3,840 4 300,000 4,500 360,000 5,400