Question

Use the following balance sheet and income statement for Smith Inc. to answer the next 4 questions.

Assets (Millions)	Liabilities and owners equity (Millions)
Cash 4000	Accounts Payable 900
Inventory 600	Accrued operating expense 400
Accounts Receivable 1500	Notes Payable 3500
Fixed assets 6000	Long Term Debt 2000
	Shareholders Equity 5300
Total 12100	Total 12100

Income Statement (millions)

Revenues 7000

COGS 4500

Operating Expenses 900

Depreciation 600

Interest 400

Taxes 500

Net Profit 100

1.Calculate Smith's DPO. Round to the nearest whole day. Do not use words when entering your response.

2.How long does Smith wait from the time an inventory order is received until payment is received? Round intermediate steps and the final answer to the nearest whole day.

115

122

127

None of the above.

3.What is Smith's cash conversion period (CCP)? Round intermediate steps and your final answer to the nearest whole day. Do not use words when entering your response.

4.After negotiating with its customers, Smith was able in decrease its DSO by six days. What will be the resulting change in Smith's accounts receivable? Round intermediate steps to the nearest whole day and your final answer to the nearest whole dollar.

37

-119

111

-74

Answer 1

1) Days Payable Outstanding (DPO) = (Accounts payable / COGS) x 365 days

or, DPO = (900 / 4500) x 365 = 73 days

2) We need to compute Days Sales Outstanding (DSO) and Days Inventory Outstanding (DIO) -

DSO = (Accounts receivables / Sales) x 365 days = (1500 / 7000) x 365 days = 78 days

DIO = (Inventory / COGS) x 365 days = (600 / 4500) x 365 days = 49 days

Time from inventory order to payment receipt = DSO + DIO = 78 days + 49 days = 127 days

3) CCP = DSO + DIO - DPO = 78 + 49 - 73 = 54 days

4) New DSO = 78 - 6 = 72 days

DSO = (Accounts receivable / Sales) x 365 days

or, 72 = (Accounts receivable / 7000) x 365

or, Accounts receivable = 1381

Change in Accounts receivable = 1381 - 1500 = (-)119