Managing A/R: Slow Collections & Cash Flow Problems

Midtown Management Company's A/R balance has been growing. Although they are pleased by the increase in sales, the junior accountant, Melody, has some concerns about cash flow. The March 31 A/R balance ($4,800) is comprised of the following accounts:

Client Amount Account Status

AR- ABC Roofing $150 Promises to pay next month

AR-Wood Floors $750 "The check is in the mail"

AR-Holiday Hearths $100 Promises to pay next week

AR-Witchy Wardrobes $450 Disconnected business phone number

AR-Dapper Diner $650 Has promised to pay since January

AR- Mistys Sodas $700 Has not returned messages for past month

Melody has asked you to evaluate the A/R balance and make any necessary adjustments.

Should any of the receivables be written off? If so, which one(s) and why? If not, why not? If so, prepare the entry to write them off, using the Direct Write Off Method.

Industry norms suggest 3% of receivables become uncollectible. Prepare the adjusting entry needed to establish a reserve for worthless A/R, assuming the Percentage of Receivables method is used, after any worthless receivables have been written off.

Perform outside research to determine the kinds of questions Melody could be asking to determine whether or not to grant credit to new customers. Essentially- how should a business assess a customers ability to pay? What other factors should be considered when accepting new business? Remember to cite your sources!

If Midtown Management Company needs cash more quickly than customers are paying, what else, besides hounding clients or cash only transactions, can they do to get cash for the business' receivables? Perform some research to explore ways the company can get cash for their receivables.