Page 406 - Accounting Principles (A Business Perspective)

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Business decision case B Jim Perry operates a large fruit and vegetable stand on the outskirts of a city. In a
typical year he sells USD 600,000 of goods to regular customers. His sales are 40 per cent for cash and 60 per cent
on credit. He carries all of the credit himself. Only after a customer has a USD 300 unpaid balance on which no

payments have been made for two months does he refuse that customer credit for future purchases. His income
before taxes is approximately USD 95,000. The total of uncollectible accounts for a given year is USD 48,000.
You are one of Perry's regular customers. He knows that you are taking a college course in accounting and has
asked you to tell him your opinion of several alternatives recommended to him to reduce or eliminate the USD
48,000 per year uncollectible accounts expense. The alternatives are as follows:
• Do not sell on credit.
• Sell on credit by national credit card only.

• Allow customers to charge only until their account balances reach USD 50.
• Allow a bill collector to go after uncollectible accounts and keep half of the amount collected.
Write a report for Perry about the advisability of following any of these alternatives.
Annual report analysis C Visit the Internet site:
http://www.cocacola.com
Locate the most recent annual reports of The Coca-Cola Company. Calculate accounts receivable turnover and
the number of days' sales in accounts receivable and prepare a written comment on the results.
Group project D In groups of two or three students, write a two-page, double-spaced paper on one of the

following topics:
Which is better—the percentage-of-sales method or the percentage-of-receivables method?
Why not eliminate bad debts by selling only for cash?
Why allow customers to use credit cards when credit card expense is so high?
Should banks be required to use 365 days instead of 360 days in interest calculations?
Present your analysis in a convincing manner, without spelling or grammatical errors. Include a cover page with
the title and authors' names.

Group project E "Lapping" of accounts receivable has been used to conceal the fact that payments received on
accounts receivable have been "borrowed" and used by an employee for personal use. With one or two other
students, research this topic in the library. Write a paper to your instructor describing how this technique works
and the steps that can be taken to detect it once it occurs and to prevent it in the future.
Group project F In a group of two or three students, visit a fairly large company in your community to
investigate the effectiveness of its management of accounts receivable. Inquire about its credit and sales discount
policies, collection policies, and how it establishes the amount for the adjusting entry for uncollectible accounts at
year-end. Also ask about how it decides to write off accounts as uncollectible. Calculate its accounts receivable
turnover and average collection period for each of the last two years. In view of its credit policies, does its collection

period seem reasonable?
Using the Internet—A view of the real world
Visit one of the following Internet sites:
http://www.federatedinvestors.com
http://www.dreyfus.com

Accounting Principles: A Business Perspective 407 A Global Text