Based on customer feedback, Ted Pendleton, manager of a company that produces photo supplies, decided to grant more liberal credit terms. Ted chose to allow customers to have 60 days before full payment of the account was required. From 2005 through 2007, the company's credit policy for sales on account was 2/10, n/30. In 2008, the policy of 2/10, n/60 became effective. By the end of 2009, Ted's company was beginning to experience cash flow problems. Although sales were strong, collections were sluggish, and the company was having a difficult time meeting its short-term obligations.

Ted noted that the cash flow problems materialized after the credit policy was changed and wondered if there was a connection. To help assess the situation, he gathered the following data pertaining to the collection of accounts receivable (balances are end-of year balances; the 2005 balance was the same as that in 2004):

Required:
1. Compute the number of times that receivables turned over per year for each of the five years. Also express the turnover in days instead of times per year.
2. Based on your computation in Requirement 1, evaluate the effect of the new credit policy. Include in this assessment the impact on the company's cash inflows.
3. Assume that the industry has an average receivables turnover of six times per year. If this knowledge had been available in 2007, along with knowledge of the company's receivable turnover rate, do you think that Ted Pendleton would have liberalized his company's creditpolicy?

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2007 008 2009 2005 Accounts receivable $100,000 $120,000 $100,000 $150,000 $190,000 Net credit sales 500,000 600,000 510,000 510,000 520,000