Financial Management

Management of Receivables
Management of Receivables 2
326 Financial Management

6. Which of the following is not a part of credit policy ?

(a) Collection Effort (b) Cash Discount
(c) Credit Standard (d) Paying Practices of Debtors
7. Which of the following are the components of credit policy ?
(a) Credit Standards (b) Credit Terms
(c) Collection Policy (d) All of these
8. Credit policy of a firm should involve a trade off between increased :
(a) Sales and Increased Profits (b) Profits and Increased Cost of Receivables
(c) Sales and Cost of Goods Sold (d) None of these
9. Why receivables are important ?
(a) For Increase in Sales (b) For Increase in Profits
(c) For Facing Competition (d) For all of these
10. Payment of creditors is a manifestation of cash held for :
(a) Transactionery Motive (b) Precautionary Motive
(c) Speculative Motive (d) All of these
11. If the closing balance of receivables is less than the opening balance for a month then which one is true out of :
(a) Collections Current Purchases (b) Collections Current Sales
(c) Current Purchases (d) Current Sales
12. If the average balance of debtors has increased, which of the following might not show a change in general ?
(a) Total Sales (b) Average Payables
(c) Current Ratio (d) Bad Debt Losses
13. Efficient billing system in used for :
(a) Credit Control (b) Evaluation of Credit
(b) both (a) and (b) (d) None of these
14. 80% of Sales of ` 10,00,000 of a firm are on credit. It has a Receivable Turnover of 8. What is the average
collection period (if 360 days in a year) and Average Debtors of the firm ?
(a) 45 days and ` 1,00,000 (b) 360 days and ` 1,00,000
(c) 45 days and ` 8,00,000 (d) 360 days and ` 1,25,000.
15. In response to market expectations, the credit period has been increased from 45 days to 60 days, this would
result in :
(a) Decrease in Sales (b) Decrease in Debtors
(c) Increase in Bad Debtrs (d) Increase in Average Collection Period
16. If a company sells its receivable to another party to raise funds, it is known as :
(a) Securitization (b) Factoring
(c) Pledging (d) None of these
17. Cash discount term ‘3/15, net 40’ means :
(a) 3% Discount if payment in 15 days, otherwise full payment in 40 days
(b) 15% Discount if payment in 3 days, otherwise full payment in 40 days
(c) 3% Interest if payment made in 40 days and 15% interest, thereafter
(d) None of the above
[Ans. : 1. (d), 2. (d), 3. (b), 4. (c), 5. (a), 6. (d), 7. (d), 8. (b), 9. (c), 10. (a), 11. (b), 12. (b), 13. (a), 14. (a), 15.
(d), 16. (b), 17. (a).]
(C) Fill in the blanks :
1. ...........are a direct result of credit sales which ultimately increase the profit earned by the firm.
2. Ageing schedule incorporates the relationship between............
3. Securitization is related to............of receivables.
4. A............is the maximum among of credit which can be extended by the firm at a given period.
5. ............is one of the component if five C's of credit.
[Ans. : 1. Receivable, 2. Debtors and outstanding days, 3. Conversion, 4. Line of credit, 5. Character.
Management of Receivables 327

☞ SHORT ANSWER TYPE QUESTIONS

1. What is meant by receivables ?
2. State the characteristics of receivables.
3. What do you understand by Management of Receivables ?
4. What is the objective of ‘Management of Receivables’ ?
5. What is Credit Policy ?
6. What is the optimum collection policy ?
7. What is meant by credit analysis ?
8. What is line of credit ?
9. Differentiate between stringent and liberal credit policy.
10. What are credit standards and which factors affects ?
11. What do you mean by ‘2/10, net 30’ ?
12. How credit analysis is done ?
13. Explain briefly the collection procedure.
14. “Credit is the soul of business.” Explain.

☞ LONG ANSWER TYPE QUESTIONS

1. What do you mean by Management of Receivables ? Explain its objectives.
2. Define receivables. Describe the factors that affect investment in a firm's receivables.
3. What do you understand by Management of Receivables ? How will you control the investment in receivables ?
Explain in details.
4. ‘‘A number of methods have been employed to speed up the collection process and maximise available cash.’’
Explain.
5. Explain the procedure for evaluating credit applicants.
6. What is payable Management ? Evaluate the performance of Payable Management.
7. Write short note on Payable Management.

☞ PRACTICAL QUESTIONS
SHORT NUMERICAL QUESTIONS
1. Rishi Ltd. annual credit sales and the year end balances of receivables is given below :
Total Credit Sales ` 5,00,000
Recievables ` 1,00,000
On the basis of the above data calculate the average credit period (ACP). Assume there are 360 operating days in
a year.
[Ans. 72 days]
2. From the following information of Raj Ltd. find out (i) Receivable, (ii) Receivables turnover `
Net Sales 10,00,000
Receivables 2,50,000
where as the budgeted sales amounts to ` 12,50,000 and average investment in receivables for a turnover of 5
times.
[Ans. 4 times]
3. Moon Ltd. gives the following information :
Sales ` 2,00,000
Receivables ` 5,00,000
Cost of Sales ` 16,00,000
Calculate average investment in receivables.
[Ans. ` 4,00,000]
4. The following data have been entrated from the books of accounts of Ayan Ltd. (`)
Receivables 2,00,000
Total Sales 12,00,000
328 Financial Management

Cash Sales 3,00,000

Returns 1,00,000
You are required to calculate the average collection period. Assume there are 360 days in a year.
[Ans. 90 days]
LONG NUMERICAL QUESTIONS
1. The year end balances of receivables are given below for three years, i.e., 2015, 2016, 2017 :
Particulars 2015 2016 2017
` ` `
Total Credit Sales 5,40,000 10,12,500 14,40,000
Receivables 90,000 1,12,500 1,20,000
On the basis of the above data you are required to calculate the average collection period (ACP) for each of the
three years and make suitable comments on the level of receivables management. Assume there are 360
operating days in a year.
[Ans. 2015—60 days; 2016—40 days, 2017—30 days]
2. The following data have been extrated from the books of accounts of a company for the year ending 31st March,
2017. `
Total Sales 20,40,000
Cash Sales 4,00,000
Sales Returns 2,00,000
Debtors (on 31.03.2017) 1,80,000
Bills Receivables (on 31.03.2017) 60,000
Provision for Bad-debts (31.03.2017) 40,000
You are required to calculated the avrage collection period for the company. Assume there are 360 days in a year.
[Ans. 50 days, Receivables ` 2,00,000, Net Credit Sales = ` 14,40,000]
3. The following information of a company for the last two years are available.
F. Y. 2016 F. Y. 2017
Net Sales ` 30,00,000 36,00,000
Receivables ` 9,00,000 9,00,000
On the basis of the above data : (i) compute the receivables turnover for the given two years and (ii) to findout
the average size of investment in receivables for an improved receivables turnover of 7.5 times on budgeted sales
volume of ` 6,75,000 for the F.Y. 2017.
[Ans. (i) 2016—3.33 times, 2017—4 times, (ii) ` 9,00,000.]
4. The following information has been taken from the books of accounts of three companies X, Y and Z:

Companies
Details
X Y Z
Receivables (year-end) 10,00,000 24,00,000 13,50,000
Credit Sales (for year) 90,00,000 14,40,000 54,00,000
All the three companies sell goods on 30 days credit. Find out average collection period of each of the three
companies and make suitable comments.
Assume 360 days in a year.
[Ans. X = 40 days, Y = 60 days, Z = 90 days]
5. A group of customers with 5% risk of non-payment desired to establish business connection with Gori Ltd. This
group would require 1.5 month of credit and is likely to increase the sales of Gori Ltd. by ` 2,00,000 p.a. cost of
sales amounted to 80% of sales. Income Tax rate is 50%.
Should Gori Ltd. accept the offer if the required rate of return is 40% (After Tax) ?
[Ans. : Net Profit After Tax ` 15,000, Return ` 8,000]
6. Naresh Ltd. is extending one month's credit to its customers and sells its products at ` 50 p.u. and has annual
sales volume of 90,000 units. A current level of production which matches with sales the product has total cost of
` 40 p.u. and variable cost of ` 30 p.u.
Management of Receivables 329

The Co. wants to extend the duration of credit from one month to two months and expects the sales to the
customers to go up by 25%, the normal expected rate of return on investment is 20%. Should the relaxation
credit period is justified :
[Ans. : Increase in Profit = ` 3,67,500.]
7. Laxmi Ltd. currently sells 60,000 units at ` 40 p.u., the average connection period is 40 days. The present
average cost per unit is ` 25 and variable cost per unit is ` 19. The company is considering to allow 2% discount
for payment prior to the 15th day after the credit sale. It is expected that if cash discount is allowed then
expected sales will be 72,000 units and the average collection period will come down to 25 days.
Assume bad debts expenses will not be affected. The company gets a return of 16%. 60% of the total sales will
be collected on cash discount.
Should Laxmi Ltd. implement the proposal ? Assume 360 days in a year for calculation.
[Ans. : Net benefits from cash discount = ` 2,30,667.]
8 Radhika Ltd. sells 60,000 units of its product per annum @ ` 70 p.u. The average cost per unit is ` 62 and the
variable cost per unit is ` 56. The average collection period is 60 days. Bad debts losses are 2% of sales and the
collection charges amount to ` 20,000.
The company wants to reduce bad debts, losses to 1% of sales and average collection period to 45 days. Which
will reduce the sales volume by 1,000 units and increase collection expenses to ` 25,000.
The company's required rate of return is 20%. Would you recommend the adoption of new policy's ? Assume
360 days in a year for your calculation.
[Ans. : Net Gain from New Policy (A—B) = ` 56,100.]
9. A company is considering pushing up its sales by extending credit facilities to the following categories of
customers :
Category ‘a’ customer with 10% risk of non-payment.
Category ‘b’ customer with 30% risk of non-payment.
The incremental sales expected in the case of ‘a’ category are ` 5,00,000, while in the case of category ‘b’ they
are ` 6,00,000.
The cost of production and selling cost are 60% of sales while collection costs amount to 5% of sales in the case
of category ‘a’ and 10% of sales in the case of category ‘b’.
You are required to advice the company about extending credit facilities to each of the above category of
customers.
[Ans. : Category (a) Incremental Income = ` 1,25,000
Category (b) Increment Income = ` Nil.]
10. A firm is selling a product currently at ` 100 per unit. The sales of the firm during the last accounting year was
80,000 units. The variable cost per unit is ` 60 and the total cost for 80,000 units is ` 80 per unit, firm fixed costs
being ` 16,00,000.
The firm is contemplating to relax its credit standards and as a result, the firm is expecting 10% increase in sales.
But at the same, by relaxing the credit standards, the average collection period of the firm is likely to increase
from 30 days to 45 days. The bad debts losses are expected to be 5% of increased sales. The collection expenses
are likely to go up ` 50,000. If the after tax required rate of return on investment of the firm is 15% and the tax
rate is 50%. Should the firm relax its credit standards ?
[Ans. : Additional Profit—` 1,15,000
Investment in Receivables—` 3,26,667
Expected Return—` 49,000.]
11. Tata Group Ltd. was formed in 1998 to manufacture a product X. The company sells this product to wholsellers
and retailers and has an annual sales of ` 60,00.000.
The following data relate to each unit of X : `
Selling Price (per unit) 36
Variable Cost (per unit) 18
Fixed Cost per Unit (approprtioned) 6 24
Net Profit 12
The cost of capital of this company is estimated at 15%. The company whishes to expand sales of this product
and believes that this can be done by offering a longer period to pay. The average collection period is currently
30 days. The company is considering three options in order to increase the sales. These are as under :
330 Financial Management

Options
(I) (II) (III)
Increase in Average by 10 days by 20 days by 30 days
Collection Period
Increase in Sales ` by 3,00,000 by 4,50,000 by 5,00,000
State which credit policy should company offer to his customers ?
[Ans. : Net Profit : Option I : ` 1,20,411, Option II : ` 1,66,438. Option III : ` 1,63,699.]
12. A firm is desiring an increase in credit period from 30 to 60 days. The average collection period which is 45 days
at present is expected to increase to 75 days. It is also likely that the bad debts expenses increases from 1% to 3%
of sales. Total credit sales are expected to increase from the level of 30,000 units to 35,000 units. The present
average cost per unit is ` 8, the variable cost and selling price per unit are ` 6 and ` 10 respectively. Assume that
the firm expects a return of 15%, should the firm extend credit period ?
[Ans. : Additional Profit = ` 12,500 \Credit period should be extended.]
13. A firm is currently selling a product at ` 100. The sales of the company during last accounting year were 80,000
units. The variable cost per unit is ` 60 and the average total cost per unit is ` 80. The firm is contemplating to
introduce cash discount policy on the term ‘2/10 net 30’. It is expected that 40% of sales will opt. for cash
discount and as a result the average collection period will improve from 30 days to 18 days. Bad debts losses will
not be affected. If the after-tax required rate of return on the investment of the company is 15% and tax rate is
40%. Should the firm implement the cash discount policy ?
[Ans. : Return on Fund Released = ` 32,000.
Since loss of Revenue (` 64,000) is higher, hence cash discount policy should not be implemented.]
14. Sonam wholeseller Ltd. at present requires payment from it customers by the month end after month of delivery.
On an average it takes them 70 days to pay. Sales amount to ` 40,00,000 p.a. and bad debt to ` 20,000 p.a.
It is planned to offer customers a cash discount of 2% for payment with in 30 days. Sonam whole seller Ltd.
estimate that 60% of customers will accept this facility but the remaining customers, who tend to be slow payers,
will not pay until 80 days after sales. At present the company has a partly used overdraft facility costing 13% p.a.
If the plan goes ahead, bad debt will be reduced to ` 10,000 p.a. and there will be savings in credit administrative
expenses of ` 6,000 p.a. Should the firm offer new credit terms to customer ?
[Ans. : Loss on Revenue = ` 40,000, The firm should not offer new credit term.]
15. A firm is desiring to follow a stricter collection period. The following details are available :
(i) At present the firm is selling 18,000 units on a credit as a price of ` 64 each, the variable cost per unit is ` 50
while the average collection period is 58 days and collection expenses amount to ` 5,000; bad debt are 5%.
(ii) If collection efforts are tightened, additional collection charges amounting to ` 10,000 would be required,
bad debts will be 3%, collection period will be 40 days. Sales volume is likely to decline by 250 units.
Assuming 20% rate of return on investments. What would be your recommendation ?
[Ans. : Total Costs = ` 13,500, The proposal may be adopted.]
16. A firm has ` 2,50,000 in receivables on July 1, 2016. The sales represented by this amount were made as under : `
June 1,00,000
May 75,000
April 50,000
And the remainder prior to April. If the credit policy terms are ‘2/10 net 30.’ Prepare ageing schedule keeping in
view the credit period and interpret the collection effort of the firm.
[Ans. : Total ` 2,50,000.]
Management of Accounts Payables
17. From the following information. Calculate payable T.O. Ratio : `
Total Purchase 30,000
Cash Purchases 8,000
Credit Purchase Return 2,000
Opening B/P 3,600
Closing B/P 2,400
Opening Creditors 2,000
Closing Creditors 1,200
[Ans. : Payable T.O. Ratio = 4 × 35 Times]
18. From the following information. Calculate opening creditors :
Credit Purchase ` 50,000
Closing Creditors ` 10,000
Management of Receivables 331

Payable T. O. Ratio 5 Times

[Ans. ` 10,000]
19. Calculate payable period (in days) from the following informations : `
Total Credit Purchase 56,750
Opening Creditors 5,600
Closing Creditors 4,400
Opening B/P 3,400
Closing B/P 2,600
Purchase Return 16,150
[Ans. 73 days]
20. From the following information. Calculate payable T.O. ratio and average payment period (in months) `
Total Purchase 40,000
Cash Purchase 7,500
Purchase Returns 2,500
Creditors 1-4-2015 2,500
Creditors 31-3-2016 3,500
B/P 1-4-2015 2,250
P/L 31-3-2016 1,750
[Ans. : (i) 6 times, (ii) 2 months]
21. From the following information. Calculate payment period :
Total Sales ` 1,20,000
Sales Return ` 20,000
G/P Ratio 20%
Opening Stock ` 8,000
Closing Stock ` 12,000
Closing Creditors ` 16,000
Closing B/P ` 4,000
[Ans. 87 days (approx)]
22. Following is the balance sheet or Akshaz Ltd. as on 31st March, 2017.
Balance Sheet
EQUITY AND LIABILITIES `
1. Shareholders Funds :
Equity Share Capital 8,00,000
Reserve and Surplus 4,00,000
2. Non-Current Liabilities :
10% Debentures 6,00,000
3. Current Liabilities :
Tr. Payables 1,00,000
Prov. for Taxation 20,000
19,20,000
ASSETS
1. Non-Current Assets :
Fixed Assets 16,00,000
2. Current Assets
Inventories 80,000
Tr. Receivables 1,20,000
Cash and Cash Equivalent 80,000
P.P. Expense 40,000
19,20,000

Calculate current ratio and liquid ratio from the above.

[Ans. (i) 2 × 67 :1, (ii) 1 × 67 :1]
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