Question

Receivables Investment

Snider Industries sells on terms of 2/10, net 35. Total sales for the year are $600,000. Thirty percent of customers pay on the 10th day and take discounts; the other 70% pay, on average, 40 days after their purchases. Assume a 365-day year.

1. What is the days sales outstanding? Do not round intermediate calculations. Round your answer to the nearest whole number.

     days

2. What is the average amount of receivables? Do not round intermediate calculations. Round your answer to the nearest dollar.

   $  

3. What would happen to average receivables if Snider toughened its collection policy with the result that all nondiscount customers paid on the 35th day? Do not round intermediate calculations. Round your answer to the nearest dollar.

$

Answer 1

a. Days sales outstanding = 30%*10+70%*40 = 31 days

b. Days sales outstanding = Accounts receivable/(Sales/365)

Accounts receivable = Days sales outstanding*Sales/365

= 31*600000/365 = $50959

c. New Days sales outstanding = 30%*10+70%*35 = 27.5 days

Days sales outstanding = Accounts receivable/(Sales/365)

Accounts receivable = Days sales outstanding*Sales/365

= 27.5*600000/365 =$45205

By reducing the credit policy, Accounts receivable will reduce by 50959-45205 = $5754