Refer to the opening feature about Sseko Designs. Assume that Liz Forkin Bohannon reports current annual sales at approximately $1 million and prepares the following income statement.

SSEKO DESIGNS

Income Statement

For Year Ended January 31, 2014

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,000,000

Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . .    610,000

Expenses (other than cost of sales) . . . . . . . . . 200,000

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 190,000

Liz Forkin Bohannon sells to individuals and retailers, ranging from small shops to large chains. Assume that she currently offers credit terms of 1y15, ny60, and ships FOB destination. To improve her cash flow, she is considering changing credit terms to 3y10, ny30. In addition, she proposes to change shipping terms to FOB shipping point. She expects that the increase in discount rate will increase net sales by 9%, but the gross margin ratio (and ratio of cost of sales divided by net sales) is expected to remain unchanged. She also expects that delivery expenses will be zero under this proposal; thus, expenses other than cost of sales are expected to increase only 6%.

Required

1. Prepare a forecasted income statement for the year ended January 31, 2015, based on the proposal.

2. Based on the forecasted income statement alone (from your part 1 solution), do you recommend that Liz implement the new sales policies? Explain.

3. What else should Liz consider before deciding whether or not to implement the new policies? Explain.