3. Accounts receivable

Effective credit management involves establishing credit standards for extending credit to customers, determining the companys credit terms, and setting up procedures for invoicing and collecting past-due accounts.

The following statement refers to a credit management policy. Select the best term to complete the sentence.

How a company handles its credit accounts, including methods of invoicing and collecting past-due accounts, is indicated by the companys _______.

a. credit standards

b. collection policy

c. credit terms

Consider the case of Ziff Corp.:

Ziff Corp.s CFO has decided to take a closer look at the companys credit policy. Ziff Corp. has annual sales of $396.3 million, and it currently has an accounts receivable balance of $47.1 million. The first step in analyzing the firms credit policy is to determine its days sales outstanding (DSO).

Based on this information, Ziff Corp.s DSO is _______ days. (Note: Use 365 days as the length of a year in all calculations.)

a. 45.55

b. 43.38

c. 30.37

d. 32.54

The average DSO for Ziff Corp.s industry is 53.9 days. Assuming that its sales stayed the same, what would be Ziff Corp.s receivables balance if it maintained the industry average DSO?

a. $67,300,400

b. $58,522,087

c. $52,669,878

d. $49,743,774

Ziff Corp.s CFO thinks that the company has not done a very good job of enforcing its credit policy. The CFO believes that if the company were to better enforce its credit policy, it would reduce its DSO to 30 days; however, this will cause Ziff Corp. to lose 5% of its sales revenue. What would Ziff Corp.s expected accounts receivables balance be if it decides to tighten its credit policy?

a. $30,943,950

b. $27,849,555

c. $26,302,358

d. $37,132,740