General Activewear Inc. (GA) designs, manufactures and distributes undecorated active wear (t-shirts, track pants and ho

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General Activewear Inc. (GA) designs, manufactures anddistributes undecorated active wear (t-shirts, track pants andhoodies) in large quantities. GA’s customers are primarilywholesale distributors who in turn decorate the products withdesigns and logos and sell the imprinted active wear. GA’s activewear products are often used for work or school uniforms, athleticteam wear or company promotional materials. GA producesapproximately 150 different product styles and each style isoffered in a variety of colours and sizes (approx. 3600 differentcombinations of style and colour). Every year GA introducesapproximately 50 new styles and colours and discontinues the samenumber of styles. The industry for undecorated active wear ishighly competitive. Maintaining a product line that isconsistent with current fashion trends is one of GAs maincompetitive advantages. However, the classic T-shirt and thevarious colours and sizes has been a standard item in the productline since inception. The classic T-Shirt normallyconstitutes 30% of the inventory balance at any point intime.
GA’s credit risk for trade accounts receivable is highlyconcentrated as the majority of its sales are to a relatively smallgroup of wholesale distributors. GA’s ten largest customersconstitute 61% of total trade receivable and its largest customer,Print and Go Inc. accounts for 20% of total accountsreceivable. Many of GA’s customers are highly leveraged andrely on GA providing favourable credit terms. Most customersreceive 45 day terms and long standing customers receive 60 dayterms. Terms greater than 30 days are standard in the industrybecause of the time lapse between when the wholesale distributerwill ultimately receive collection from the end consumer.
Extending credit to customers involves considerable judgment. GAhas a dedicated credit manager, Nancy Tight, who evaluates eachcustomer’s financial condition and payment history. It is herresponsibility to prepare recommendations for customer creditlimits and payment terms. Nancy reviews external creditratings (if available), the customer’s financial statements andobtains bank and other references. In the case of existingcustomers she also reviews the customers past payment history.Based on this analysis she prepares a recommendation and forwardsit to Francis for approval.
Francis is very conservative when it comes to granting credit tonew customers or increasing credit limits of existingcustomers. She diligently reviews the research conducted byNancy. She often requires Nancy to reduce her recommendedlimits and has often denied extending credit to potential customersdespite Nancy’s recommendation. Historically, due to this stringentprocess, GA has had insignificant bad debts.
Once new customers are approved Nancy enters the new customerdetails and agreed upon terms into the company’s ERP system. Nancy and Francis are the only employees who have access rights toadd new customers and make changes to credit terms. Thesystem requires that Francis approve all changes. At the endof each week the system generates a report noting all changes tothe customer Masterfile. This report is reviewed by bothFrancis and Catherine.
When customer orders are received they are entered into thesystem by a customer order clerk. The system automaticallyvalidates the order and performs a check to ensure the order valueplus the current customer balance is below the authorized creditlimit. When goods are shipped, the system automaticallygenerates the sales invoice and the sales is recorded. Standard sales terms are FOB shipping point.
Required Assume that you have decided torely on controls in the sales cycle. Select 4 differentcontrols in the sales cycle. For each control provide aprocedure that would test the effectiveness of control. (8marks)
Use the following chart format to complete your answer.