Question

Dionne Gifts Inc. is a large Canadian wholesale importer of gift items from around the world. Dionne sells its merchandise to retailers across the country. Gift importing is a competitive business because there are a lot of alternative sources for many items so it's important for importers to be sensitive to the needs of their customers. Currently, Dionne allows its customers up to 60 days to pay for their purchases. The president of the company, Greg Dionne, is considering reducing the amount of time customers have to pay to 30 days. He says that some of his competitors already offer those terms and he thinks doing so will improve the company's cash flow.
Greg Dionne has asked for your help assessing the impact of reducing the number of days customers get to pay. He provides you with the following estimate of quarterly sales for the upcoming 2017 fiscal year. He also points out that he expects sales in the fourth quarter of 2016 to be $975,000:




Required:
a. How much will Dionne collect each quarter if it continues to offer customers 60 days to pay? What would accounts receivable be at the end of 2017? (Assume sales occur evenly throughout each quarter.)
b. How much will Dionne collect each quarter if it changes its policy effective January 1, 2017 and offers customers 30 days to pay? (Remember that the amount in accounts receivable represents sales that gave customers 60 days to pay.) What would accounts receivable be at the end of 2017?
c. What is the impact on cash flow of changing the collection period? What is the impact on accounts receivable?
d. Suppose sales in 2017 are exactly the same as in 2018. What would collections in each quarter be in 2018? What's the long-term impact on cash collections of reducing the collection period to 30 days?
e. Do you think it's a good idea for Dionne to change the collection period? Don't just consider cash flow in youranswer.


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  • CreatedFebruary 26, 2015
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