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In: Accounting

Sky-High, Inc. pays company management bonuses at the end of each year if net income is...

Sky-High, Inc. pays company management bonuses at the end of each year if net income is equal to or greater than a specific percentage of net sales. However, in the past five years, that metric has not been reached. During these past five years, Sky-High has been lowering the requirements for granting credit to customers so that more sales can be generated. However, making those credit changes has caused the company’s uncollectible accounts percentage to rise substantially; for last year, it was 8.5% of the year’s net sales.

Before the past five years, Sky-High had been estimating uncollectible accounts at 3% of net sales. That rate had been effective in that no material adjustments needed to be made at any year-end. The CEO has asked you (the company accountant) to return to using that 3% percentage. His rationale is that the economy is strengthening and so uncollectible accounts should begin to decrease. If the 3% is used, all company management will receive a small bonus for this first time in five years.

1. Provide three alternatives related to accounts receivable that might help improve the company’s profit performance.

Solutions

Expert Solution

Following three alternatives related to accounts receivables that might help to improve the company's profit performance:

  • Better credit terms: This might include practicing stringent credit terms. We advise making the credit more stringent and still giving more incentive to good customers. We can further incentivize the early payments and impose a small penal fee for late payments.
  • Debtor Age Report: Debtor Age Report shall be prepared and policy of not extending any further credit to any customer having debtor age of 90 days shall be applied. Discount can also be given to old debtors to pay off their dues at a lower rate.
  • Different Payment Modes: Facility of different payment modes such as online payment, cheques, cash shall be given to the customer to increase the flexibility.
  • Hiring Collection Agents: Hiring collection agents to collect the dues might also help to improve the profitability.

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