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Balance Sheet: Cash $       20 A/R 1,000 Inventories     2,000 Total current assets $ 3,020 Net...

Balance Sheet:

Cash

$       20

A/R

1,000

Inventories

    2,000

Total current assets

$ 3,020

Net fixed assets

    2,980

Total assets

$ 6,000

Income Statement:

Sales

$10,000

Cost of goods sold

    9,000

EBIT

$ 1,000

Interest (10%)

       600

EBT

$     400

Taxes (40%)

       160

Net Income

$     240

The industry average DSO is 18 (360-day basis). Collins plans to change its credit policy so as to cause its DSO to equal the industry average, and this change is expected to have no effect on either sales or cost of goods sold. How much cash can the company free up from reducing receivables?     

The industry inventory turnover ratio is 15. Collins plans to reduce the inventory level to equal the industry average. How much cash can the company free up from reducing inventories? Assume that the sales level & cost of goods sold will remain constant.

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