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The sales revenue in a company was 2 million and its receivables were 5% of sales. The company wishes to have an allowance for receivables of 4% of receivables, which would make the allowance one third higher than the current allowance
How will the profit for the period be affected by the change in allowance??I assume that you have worked out the allowance needed for this year?
(5% x $2M x 4% = $4,000).The allowance for last year is calculated in the same sort of way as the other question that you asked me earlier today – if last year was X, then this year is X + 1/3X = 4/3X
Since this year is 4,000, last year (X) must have been 3,000.
So they are increasing the allowance by 1,000. So the profit will be reduced by the cost of increasing the allowance.
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