Question

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

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

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

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