The accounting records of Backspace, Inc., revealed an accounts receivable balance of $195,000 on January 1, 20x8. 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 20x8, 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%
Collected in the month of sale 15%
Collected in the month following sale 75%
Uncollectible 10%
Required:
A. Compute the company's cash inflows for January and February, 20x8.
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.