1. Table 1: Aging Schedule of Accounts Receivable
AGE OF ACCOUNT| BALANCE OUTSTANDING| % OF TOTAL BALANCE OUTSTANDING| 0-15 days| $ 20,000| 19.59 %|
16-30 days| 30,000| 29.39|
31-60 days| 40,000| 39.19|
61-90 days| 10,000| 9.80|
Beyond 90 days| 2,071| 2.03|
TOTAL| $ 102,071| 100.0 %|
2. To evaluate the credit quality of Aero-Strip’s accounts receivables portfolio, we turn to their average collection period (ACP) and aging of accounts receivable. Knowing the ACP enables the firm to determine whether there is a general problem with the accounts receivable. The firm has credit terms of 2/10, net 30 so it would expect its ACP to equal about 30 days. Calculating the ACP of the firm, we get: ACP=Accounts Receivable ×365 daysNet credit sales= $100,000 ×365 days$705,882=51.71 days
Since ACP is significantly higher than 30 days, the firm should review its credit policy. In addition, the industry norm for ACP is only 32 days. Next, we turn to the aging accounts receivable schedule. Because Aero-Strip extends a credit term of 2/10, net 30 to its customers, its customers have 30 days to remit the payment. Looking at the aging schedule of A/R (answer in #1), the 48.98% of the balance outstanding with an age of 0-30 days is current. A portion of 19.59% takes the cash discount offered. The balances outstanding for 31-60 days, 61-90 days and beyond 90 days are overdue which represents 51.02% of the whole amount of outstanding balance. Of the balance outstanding, 39.19% is 1-30 days overdue, 9.86% is 31-60 days overdue and 2.03% is more than 60 days overdue. The 2.03% is usually seen as uncollectible and a bad- debt. This is another sign that something is wrong with the company’s credit policy.
The collection seem generally slow and a noticeable irregularity in these data is the high percentage of balance outstanding that is 1-30 days overdue. Clearly, a problem must have occurred 31-60 days ago. The problem can be attributed to the account of Miller Aerial Surveying as shown below: Table 2:
CUSTOMER| AMOUNT| 0-15 days| 16-30 days| 31-60 days| 61-90 days| Beyond 90 days| Ace Aviation, Inc.| $ 10,985| $ 7,296| -| $ 3,689| -| -| Express Shuttle| 26,294| 4,281| $ 14,263| 1,132| $ 6,608| -| Lomax Charter| 7,926| 1,986| 511| 5,429| -| -| Miller Aerial Surveying | 44,942| 3,870| 9,251| 29,750| -| $ 2,071| Pointers Aviation, Inc.| 11,924| 2,557| 5,975| -| 3,392| -| TOTAL| $ 102,071| $ 20,000| $ 30,000| $40,000| $ 10,000| $ 2,071|
Furthermore, the same customer is responsible for the bad-debt losses which are 60 days overdue. There is a sizeable amount of delinquent accounts, thus the company is undoubtedly suffering from a cash flow perspective. Their cash flow is probably low and they have to borrow short-term funds in order to cover these delinquent accounts, this means they are paying interest on short term loan. Unfortunately, their times interest earned ratio is: TIMES INTEREST EARNED RATIO=EBITInterest Expense=$161,788$ 112,739=1.44x
while for its competitors, its 2.3. This means that the firm’s likelihood to cover its interest payments is lower than that of the competitors. 3. Aero-Strip, Inc. should prepare an aging schedule of accounts receivable because this helps the firm determine whether the problem exists in its accounts receivable in general or is attributable to a few specific accounts. The purpose of the aging schedule of accounts receivable is to enable the firm to pinpoint problems. It is a means by which we can obtain insight into the liquidity of receivables and management’s ability to enforce its credit policy.
4. Given Aero-Strip’s receivables portfolio, the total financing that the pledging arrangement will provide is $ 58,668.49.
CUSTOMER| AMOUNT (up-to-date)| AMOUNT (1-30 days)|