The Accounting Records of Backspace, Inc $20 \%$ Credit Sales $80 \%$

question 81

Essay

The accounting records of Backspace, Inc., revealed an accounts receivable balance of $195,000 on January 1, 20x6. Forty percent of the company's sales are for cash, and the remaining 60% are on account. Of the credit sales, 30% are collected in the month of sale and 70% are collected in the following month. Total sales in January and February are expected to amount to $500,000 and $530,000, respectively.
Assume that in the latter half of 20x6, Backspace hired a new sales manager who aggressively tried to maximize the company's market share. She implemented a compensation system for the sales force that was 100% commission based, with the commission calculated on the basis of gross sales dollars. Sales volume increased dramatically in a very short period of time, and the sales and collection patterns changed, as follows: Cash sales: $20 \%$
Credit sales: $80 \%$
$\begin{array} { l l } \text { Collected in the month of sale } & 15 \% \\ \text { Collected in the month following sale } & 75 \% \\ \text { Uncollectible } & 10 \% \end{array}$
Required:
A. Compute the company's cash inflows for January and February, 20x6.
B. Determine the outstanding receivables balance at the end of February.
C. Compare the sales and collection patterns before and after the arrival of the new sales manager. Have things improved or deteriorated? Explain.
D. On the basis of the information presented, determine what likely caused the improvement or deterioration in collection patterns.

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Definitions:

Schedule A

An itemized deductions form where taxpayers list eligible expenses to reduce their taxable income, including medical, taxes paid, interest, gifts to charity, and casualty losses.

Foreign Tax Credit

A permanent tax credit for income taxes handed over to an overseas authority as a consequence of foreign income tax deductions.

Appreciated Capital Gain Property

Property that has increased in value over time, where the capital gain realized from its sale is taxed at a possibly reduced rate depending on the duration of ownership.

Tax-Exempt Status

A designation that allows an organization or entity to be exempt from federal income tax under certain sections of the Internal Revenue Code.