Question

5.1. The sales director of New World Limited has drafted a scheme to increase sales by relaxing credit limits imposed on customers. Sales invoices, at present payable after a one-month credit period, should henceforward be payable after two months. Currently, sales are steady at R500 000 per month, earning a gross profit margin of 18%. If two months’ credit is allowed, sales would increase to R620 000 per month. An extra clerk to account for the new customers will be employed at R15 000 per annum. The finance director fears that extending sales credit will increase the bad debts suffered from 1% of sales to 2% of sales. He is also concerned about the overdraft limit, but the bank manager is very supportive of the scheme, offering extended overdraft facilities at 14% per annum. Evaluate the sales director’s scheme. Also factor in the cost of carrying the debtors as part of your calculation. Perform these calculations based on yearly figures. (12)

5.2. List three (3) methods which may be used to ensure the proper control of accounts receivable

Answer 1

5.1

Evaluation of sales directors Scheme

   

Particulars	Present Situation	Proposed Situation
Sales Turnover( per annum)	60,00,000(500000*12)	74,40,000 (620000*12)
Gross profit Margin@18% of Sales	10,80,000	13,39,200
Less: Additional Salary to employee	-	(15000)
Less:Baddebts	(60,000) [6000000*1%]	(148800) [7440000*2%]
Profit	1020000	1175400

Compared to the present situation, The proposed situation has a higher profit. So, it is better to go for 2 months' credit.

5.2

Methods Used for proper control of Accounts Receivables

  

1) Segregation of Duties for Accounts Receivable

Segregation of the duties of accounts receivable management is an important internal control method. By dispersing the accounts receivable management duties among different employees, you can increase oversight and reduce the opportunity for fraud. Segregation of duties for accounts receivable means that no one person has sole responsibility for more than one of the four main functions of accounts receivable management:

• Custody of accounts receivable
• Authorization to use the accounts receivable receipts
• Recording accounts receivable
• Production of accounts receivable reports

 

2) Post the Sales Journal

The sales journal provides a clear view of each sales transaction, detailing what customers purchased, the credit extended and the payment received. Careful internal control over receivables includes these sales journal steps

• Using an invoice copy to quickly post to the sales journal for each transaction;
• Reviewing journal entries against invoices to ensure accuracy;
• Filing invoice copies by invoice number; and
• Posting the sales journal totals to the accounts receivable control account in the general ledger.

 

 3) Accounts Receivable Internal Control Checklist

Well-documented policies and procedures for who should handle which accounts receivable responsibilities, and how those responsibilities should be handled, is an important factor in establishing strong internal control over accounts receivable Be sure to implement these controls along the entire accounts receivable management process.

 

Evaluation of sales directors Scheme

 

Particulars	Present Situation	Proposed Situation
Sales Turnover( per annum)	60,00,000(500000*12)	74,40,000 (620000*12)