2. Breezy Company
(This case was prepared prepared by Elizabeth Morris, Lehigh University.) University.) Breezy Company of Bethlehem, Pennsylvania, is a small wholesale distributor of heating and cooling fans. The company deals with retailing firms that buy small-to medium quantities of fans. The president, Chuc Breezy, was very pleased with the mared increase in sales over the past couple of years. !ecently, however, the company"s accountant informed Chuc that although net income has increased, the percentage of uncollectibles has tripled. #ue to the small size of the business, Chuc fears he may not be able to sustain these increased losses in the future. $e has ased his accountant to analyze the situation. Background %n &''(, the sales manager, )ohn Breezy, moved to *lasa, and Chuc hired a young college graduate to tae over the position. The company had always been a family business and, therefore, measurements of individual performance had never be en a large consideration. The sales levels had been relatively constant because )ohn had been content conten t to sell to certain customers with whom he had been dealing for years. Chuc was leery about abo ut hiring outside of the family for this position. To incentive based on net sales. The new sales manager, Bob +ellmore, was eager to set his career in motion and decided he would attempt to increase the sales levels. To do this, he recruited new customers while eeping the old clientele. *fter one year, Bob had proved himself to Chuc, who decided to introduce an advertising program to further increase sales. This brought in orders from a number of new customers, many of whom Breezy had never neve r done business with before. The influ of orders ecited Chuc so much that he instructed )ane Breezy, the finance manager, to raise the initial credit level for new customers. This induced some customers to purchase more. Existing System The accountant wrote up a comparative income statement to show changes in revenues and epenses over the last three years, shown in hibit *. Currently, Bob is receiving a commission of percent of net sales. Breezy Company uses credit terms of net /0 days. da ys. *t the end of previous years, bad debt epense amounted to approimately percent of net sales. *s the finance manager, )ane performs credit checs. %n previous years, )ane had been familiar with most clients and approved credit on the basis of past behavior. 1hen dealing with new customers, )ane usually approved a low credit amount and increased it after the customer ehibited reliability. 1ith 1ith the large increase in sales, Chuc felt that the current policy was restricting a further rise in sales levels. $e decided to increase credit limits to eliminate this restriction. This policy, policy, combined with the new advertising program, should attract man y new customers.
Future The new level of sales impresses Chuc and he wishes to epand, but he also wants to eep uncollectibles to a minimum. $e believes the amount of uncollectibles should remain relatively constant as a percentage of sales. Chuc is thining of epanding his p roduction line but wants to see uncollectibles drop and sales stabilize before he proceeds with this plan. Required: Analyze the weaknesses in internal control and suggest improvements.
Based on the problem, we"ve identified three internal control weanesses namely, &.2 *uthorization of control, .2 Terms of trade and lastly, /.2 !eward %ncentives. For Authorization o Control
1e suggest that they set credit limits based on outside credit verification for initial credit limits. 1e also encourage them to establish decision criteria to increase credit limit such as eamining payment history because inappropriate credit limits may be a reason that bad debt epense is increasing disproportionately with sales For !erms o !rade
1e suggest that they offer sales discounts for early payment and charge a finance charge for payments not made within /0 days. For "eward #ncentives
%nstead of using net sales, use net sales less uncollectible accou nts.
