Paperco office Supply Ltd

Paperco Office Supply Ltd.  is a company that sells business and office supplies based in Sherbooke. Quebec. Mr. Paper decided when he created the company to offer credit to anyone who asks for it in order to compete with big competitors like Staples. Due to this misstep he experienced liquidity problems and has not been able to pay several suppliers in a while, even though Paperco’s sales have increased.

 Problem #1:

The salesmen are only paid minimum wage and are paid extra weekly commission.

Impact of the problem:

Paying commission on the total amount of sales each week will affect the company’s liquidity. As the base salary is so low, the commission encourages the salesmen to sell at high volumes, which will lead to more credit sales. This leads to problems with liquidity, as we do not know when customers will pay in full. In addition, the commission is liquid money that is going out of the company on a weekly basis, leading to further liquidity problems.

Solution:

Offer a discount to customers who pay cash, and a higher commission to salesmen who get customers to pay with cash.  A higher volume of cash sales will decrease the liquidity problems of the company.

Problem #2:

Mr. Paper believes that the cost 3% of sales is too expensive to justify the purchase of a credit/debit terminal.

Impact of the problem:

He may lose customers that would prefer to pay debit/credit, which would be a greater loss of money to the company than the 3% cost of each sale. This may also lead to liquidity problems as the company may offer credit, which could lead to uncollectable accounts in future.

Solution: Purchase a debit/credit terminal.

Problem #3:

Mr. Paper only reviews the receivable list 2 or 3 times a year for defaulting customers, as there is no system in place other than Excel.

Impact of the problem:

Mr. Paper may have many uncollectible accounts if his policy of paying back is too loose. The customers have no incentive to pay back as he only reviews the receivable list 2 or 3 times a year.

Solution:

The company should purchase an accounting software so Mr. Paper can call the customers who have not paid more often. Mr. paper would be able to estimate the allowance for doubtful accounts at any time. He will have more control over the company and be able to identify liquidity problems more rapidly.

Problem #4:

No transactions were recorded in the Allowance for Doubtful Accounts account during the year.

Impact of the problem:

The company will not have the correct amount of bad debt in their financial statements and will show more liquidity than the actual amount.

Solution:

Paperco must do an adjusting entry after selecting a method to use to estimate the allowances.

Calculations:

Method #1: Percentage applied to total

Percentage estimated by management: 20%

We are using 20% as an estimate because the average collection period for the industry is 76 days. The industry average for the likelihood of uncollectibility for a receivable between 61-90 days is 20% .

Methods #2: With percentages applied to each aging category.

We have used 15%, 25%, 20% and 60%, which is aggressively higher than the industry average for the likelihood of uncollectability of receivables. Since we have not charged the companies interest we feel it is likely that many accounts will be uncollectible.