V. R. Rao and Company has been operating for five years as a software consulting firm specializing in the installation of industry standard products. During this period, it has experienced rapid growth in sales revenue and in accounts receivable. Ms. Rao and her associates all have computer science backgrounds.

This year, the company hired you as its first corporate controller. You have put into place new credit-granting and collection procedures that are expected to reduce receivables by approximately one-third by year-end. You have gathered the following data related to the changes:

Required: 1. Compute the accounts receivable turnover ratio based on two different assumptions:

a. Those presented in the preceding table (a decrease in the balance in accounts receivable, net).

b. No change from the beginning of the year in the accounts receivable balance. 2. Compute the effect of the projected change in the balance in accounts receivable on cash flow from operating activities for the year (the sign and amount of effect). 3. On the basis of your findings in requirements ( 1 ) and (2), write a brief memo explaining how an increase in accounts receivable turnover can result in an increase in cash flow from operating activities.

Also explain how this increase can benefit the company.

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Accounts receivable Less: Allowance for doubtful accounts Net accounts receivable Net sales (assume all on credit) Beginning of Year $1,000,608 36,800 $ 963,808 (IN THOUSANDS) End of Year (projected) $ 660,495 10,225 $ 650,270 Current Year (projected) $7,015,069