Case Topic: If Things Get Any Better, We’ll Be Broke
Chapter 7, Case 7.2
Financial & Management Accounting
Group members& Responsibility Assignment:
Ruiying Wu：Case Introduction
Qianqian Xu：Suggestion & Solution
Shisi Xu：Case Analysis (Type Setting & PPT)
Part One: A brief introduction of the company
1) Rock, Inc., a small company that sells stereo equipment is founded by Maxwell “Rock”
Swartz. It used the 30-day accounts in the past and has recently changed into the Double
Zero. Under the 30-day accounts, the company made sales on accounts and the accounts
receivables are due in 30 days. The company is still using the direct write-off method and
the uncollectible accounts expense is about 1% of the net sales. Under the Double Zero,
customers purchase merchandise on account with no down payment and no interest
charges. The accounts are collected in 12 monthly installments of equal amounts. The
uncollectible accounts rate is unclear.
2) We can see the table below. Under the 30-day accounts, cash sales accounts for 25% of
the total sales, sales by national credit card makes up 35%, and 30-day accounts
contributes 40%. The company earned a modest profit. Monthly cash receipts exceeded
monthly cash payments by a comfortable margin.
After adopting Double Zero, the monthly sales have increased. However, it is faced with
cash problems.
Sales Before Double Zero Last Month
Cash Receipts Before Double Zero Last Month
3) Thus the company is now in the dilemma. A heated discussion between the
bookkeeper and the founder breaks out. And in the bookkeeper’s opinion, they are facing
these problems:
l It hasn’t been generating enough cash to pay its suppliers, most of which require
payment within 30 days.
l Accounts receivable have increased nearly sevenfold and are still growing.
l Cash Receipts are down to nearly half of what they used to be.
Part Two: Case Analysis
We analyzed this case by giving answers to four questions, including four aspects——the
consequence caused by Double Zero plan, uncollectible accounts expense’s change, cash
receipts’ change and accounts receivable.
1) Is it logical that the Double Zero plan is causing sales and profits to increase while
also causing a decline in cash receipts?
It’s logical. Under Double Zero method, customers do not have to pay the full bill in 30
days, which does relieve their pressure of payment and the cash flow problems. As they
have merchandise to sell for cash, their current purchasing power and the ability to pay in
