Analysis of Accounts Receivable and Credit Policy
Based on customer feedback, Ted Pendleton, manager of Gray Company, which produces photo supplies, decided to grant more liberal credit terms. Ted chose to allow customers to have 60 days before full payment of the account was required. From 2010 through 2012, Gray’s credit policy for sales on account was 2/10, n/30. In 2013, the policy of 2/10, n/60 became effective. By the end of 2014, Gray was beginning to experience cash flow problems. Although sales were strong, collections were sluggish, and the company was having a difficult time meeting its shortterm obligations. Ted noted that the cash flow problems materialized after the credit policy was changed and wondered if there was a connection. To help assess the situation, he gathered the following data pertaining to the collection of accounts receivable (balances are end-of-year balances; the 2010 balance was the same as that in 2009):