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