QUESTION 1 [32 MARKS]

Bata manufactures a high volume of reasonably prices shoes for elderly people. The company has a trade receivables ledger that is material to the financial statements containing four different categories of account. The categories of account, and the risks associated with them, are as follows:

i. Small retails shops. These accounts represent nearly two thirds of the accounts on the ledger by number and one third of the receivables by value. Some of these customers pay promptly, others are very slow.

ii. Large retails shoe shops (including a number of overseas accounts) that sell a wide range of shoes. Some of these accounts are large and overdue.

iii. Chains of discount shoe shops that buy their inventory centrally. These accounts are mostly well-established high street chains. Again, some of these accounts are large and overdue; and

iv. Mail order companies who sell the companys shoes. There have been a number of large new accounts in this category, although there is no history of irrecoverable debts in this category.

Receivables listed under ii. And iv. are roughly evenly split by both value and number. All receivables are dealt with by the same managers and staff and the same internal controls are applied to each category of receivables. You do not consider that using the same managers and staff, and the same controls, is necessarily the best method of managing the receivables ledger.

Bata has suffered an increasing level of irrecoverable debts and slow payers in recent years, mostly as a result of small shoe shops becoming insolvent. The company has also lost several overseas accounts because of a requirement for them to pay in advance. Management wishes to expand the overseas market and has decided that overseas customers will in future be allowed credit terms.

Required:

a. Classify the risks relating to the four categories of trade receivables as high, medium or low and explain your classification. (16 marks)

b. Describe the internal controls that you would recommend to Twinkletoes to manage the risks associated with the receivables ledger under the headings

a. All customers (4 marks)

b. Slow paying customers (4 marks)

c. Larger accounts (4 marks)

d. Overseas customers (4 marks)