Question

Now assume that the management of Box Firm decides to “tighten” the

firm’s credit terms to reduce the amount of financing needed for “Accounts

Receivable.” The new credit terms are 2%, 10; net 30. Assume that customers continue

their same payment patterns:  45% take the discount and pay on Day 10; 50% pay at the

end of the credit period on Day 30; the final 5% pay late on Day 35.

a. What is Box Firm’s new “Days Sales Outstanding” (DSO), based on the

proposed new credit terms?

b. Based on the “Average Daily Sales” that you calculated in Question #2 above and the

firm’s new DSO that you calculated in Question #4.a. above, what is Box Firm’s likely “Accounts Receivable” balance if the new credit terms are

implemented?

Answer 1

Solution Question no.a

Assume the credit sale of Box Firm is $ 100 and the credit term is 30 days

As per new term:-

Amount collected in 10 days from the date of credit sale:- $ 45

Amount collected in 30 days from the date of credit sale:- $ 50

Therefore, the total amount collected in 30 days credit period is $ 95

The amount outstanding after 30 days is $ 5

The formula for finding DSO = Accounts Receivable / Credit Sales * 365

= $ 5 / $100 * 365 days (DSO of the Box Firm after 30 days of credit term as per new pattern)

=18.25 days

The DSO at the end of credit period (i.e 30 days) = 18.25 days

When the balance receivable $ 5 is collected on the 35th day, the 5 days (5 days more from credit period) is added back to the DSO.

In total, it takes 23.5 days (DSO) to collect the accounts receivables of Box Firm as per new credit policy extended to the customers.

Note:- 1 Question is answered