Milwaukee Surgical Supplies to Calculate the Firm's Essay

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Milwaukee Surgical Supplies

To calculate the firm's average collection period, we take a weighted average of the payment schedules. The terms of sale are 3/10, net 30. This means that customers of Milwaukee Surgical Supply are to pay their bills within 30 days. They receive a 3% discount if they pay within ten days. Gross sales for the year are $1,200,000.

30% of customers pay on the tenth day to receive the discount. 40% pay on the 30th day, and 30% pay on average of 40 days. Thus, the average collection period is:

(.3)(10) + (.4)(30) + (.3)(40) = 27 days.

To calculate the current receivables balance, the receivables turnover ratio can be used. This ratio is:

Receivables turnover in days = 360 / (Total Sales / Avg. Receivables)

(total sales / receivables) = 360

$1,200,000 / receivables = 360/27

$1,200,000 = (13.33) receivables = $1,200,000 / 13.33 = $90,000

If the company toughened its receivables policy so that all non-discount customers paid on the 30th day, the new average collections period would be:

(.3)(10) + (.7)(30) = 24 days.

This would give a receivables balance of:

( $1,200,000 / 360 ) * 24 = $80,000

Note that this calculation is a re-working of the calculation that was used above. If that calculation was used, the result would be the same:

24 ($1,200,000 / R) = 360

$1,200,000 / R = 360/24

$1,200,000 = R (15)

R = $1,200,000 / 15 = $80,000

4. To calculate the annual savings from this new, tougher, policy, the carrying cost of the difference must be calculated.

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The difference is:

$90,000 - $80,000 = $10,000

The carrying cost of $10,000 over the course of the year at 8% is (.08)(10,000) = $800.

Thus, the new policy saves the company $800 over the course of the year.

This can also be calculated as follows:

(.08)(90,000) - (.08)(80,000) = Savings

$7,200 - $6,400 = Savings

S = $800

5. Financial statement analysis is the use of financial statements to explain the financial condition of the firm (McClure, 2011). There are a number of metrics that are derived from the financial statement. These include liquidity and solvency ratios, profitability ratios and efficiency ratios. Each of the different ratios provides insight into an element of the firm's operations. What financial statement analysis does is it uses these ratios to attempt to explain what is going on at the firm. For example, if the receivables turnover increases in the year, this could be taken as an indication that the firm has loosened its credit policy. If an event such as this corresponds with an economic downturn, it could be taken as a sign that the company's customers have seen a downturn in their business, which is making it more difficult for them to pay on time.

Operating indicator analysis is the process of using key metrics that are not on the financial statements to explain what is on the financial statements. Most firms have operating indicators as part of their managerial accounting. Airlines, for example,.....

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