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    Assignment #2

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    Angela Angeles
    The new credit policy is not favorable for Boston Scientific. The accounts receivable turnover ratio of 10.03 times per year means customers on average pay 36 days late compared to the new 20-day payment policy. This suggests the credit policy should be improved to increase cash flow available for short-term liabilities.

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    Assignment #2

    Uploaded by

    Angela Angeles
    85 views2 pages
    The new credit policy is not favorable for Boston Scientific. The accounts receivable turnover ratio of 10.03 times per year means customers on average pay 36 days late compared to the new 20-day payment policy. This suggests the credit policy should be improved to increase cash flow available for short-term liabilities.

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    The new credit policy is not favorable for Boston Scientific. The accounts receivable turnover ratio of 10.03 times per year means customers on average pay 36 days late compared to the new 20-day payment policy. This suggests the credit policy should be improved to increase cash flow available for short-term liabilities.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    85 views2 pages

    Assignment #2

    Uploaded by

    Angela Angeles
    The new credit policy is not favorable for Boston Scientific. The accounts receivable turnover ratio of 10.03 times per year means customers on average pay 36 days late compared to the new 20-day payment policy. This suggests the credit policy should be improved to increase cash flow available for short-term liabilities.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 2

    2) The effect of the new credit policy is not favorable for the company.

    In order to quantify the effect of


    the new credit policy, we will determine the accounts receivable turnover ratio and the average duration
    of accounts receivable or the number of days it takes to collect them during the year.

    Average AR = Beginning AR + Ending AR = $1,207,393 + $1,392,790 = $1,300,091.50


    2 2

    AR Turnover Ratio = Credit Sales for the Current Pd. = $13,035,085. = 10.03
    Average AR $1,300,091.50

    Ave. Duration of AR = 365 days = 36.39 days


    10.03

    The above formulas can be interpreted to mean that Boston Scientific, Inc. collected its receivables 10 .03
    times on average for the current year. In other words, the company converted its receivables to cash 10.03
    times that year.

    The average duration of accounts receivable in days would be 36.39 days. This means that the company’s
    customers on average take 36 days to pay their receivables. As stated in the problem, the company had a
    shift from a 30-day payment period to a 20-day payment policy for its customers for the current year. The
    average accounts receivable turnover shows that, on average, customers are paying 16 days late.

    Hence, it can be inferred that Boston Scientific’s new credit policy is not favorable to the company. It
    should improve its turnover ratio by making changes to its accounts receivables collection process.
    Accounts receivable turnover is important since it helps companies determine how much cash is available
    to pay their short-term liabilities.

    3) The company inventory management of Vivicom Technologies is not desirable as compared to that of
    companies of similar industry.

    Average Inventory = Beginning Inventory + Ending Inventory = 58,160 + 62,880 = 60,520


    2 2

    Inventory Turnover = Cost of Sales = $300,000 = 4.96


    Ave. Inventory 60,520

    Days of Inventory = Ave. Inventory = 60,520 = 73.63


    Cost of Sales $300,000

    The above formula can be basically interpreted as follows, inventory turnover determines how many
    times in a year inventory is sold or used, while days in inventory is the number of days it takes to turn
    inventory into sales.

    The inventory turnover of the company is only 4.96 times as compared to industry average of 11 times.
    While the company’s days of inventory is at 73 days versus industry average of 38 days only. The low
    turnover rate of the company implies weak sales and possibly excess inventory. It may indicate a problem
    with the goods being offered for sale or be a result of too little marketing.
    The speed at which a company can sell inventory is a critical measure of business performance. The
    longer an item is held, the higher its holding cost will be, and the fewer reasons consumers will have to
    return to the shop for new items.

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