Question

A firm’s annual credit sales are $1.4 million, with 53% of its daily average paid out in purchases. It usually takes the company 29 days to meet its purchasing obligations. This payment pattern has not changed in recent years. However, the firm’s commitment to accounts receivable has shifted based on its current annual net income of $29k which meets the 2.48% required return, anticipated by senior management a year earlier. Normally, the firm collects its accounts in 23 days, an average which remains unaffected.

Note: Note: The term “k” is used to represent thousands (× $1,000).

Required: In percentage terms, by how much are the firm’s receivables greater than its payables?

Answer 1

Receivables outstanding = 1400000*23/365 =	$           88,219
Payables outstanding = 1400000*53%*29/365 =	$           58,953
Receivables/Payables = 88219/58953 =	149.64%
In percentage terms, the firm’s receivables greater than its payables by 49.64% [149.64%-100%]

USING 360 DAYS THE ANSWER WOULD BE THE SAME:
Receivables outstanding = 1400000*23/360 =	$           89,444
Payables outstanding = 1400000*53%*29/360 =	$           59,772
Receivables/Payables = 88444/59772 =	149.64%
In percentage terms, the firm’s receivables greater than its payables by 49.64% [149.64%-100%]