Question

Use the following balance sheet and income statement for Sullo Inc. to answer the next 5 questions. Hint: Some questions may yield negative answers.

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. Find Sullo's days sales outstanding (DSO).  Round to the nearest whole day.

2. Calculate Sullo's DPO. Round to the nearest whole day.  

3. How long does Sullo 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.

4. What is Sullo's cash conversion period (CCP)? Round intermediate steps and your final answer to the nearest whole day.

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

Answer 1

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

2) DPO = (Accounts payable / Cost of goods sold) x 365 days = (900 / 4500) x 365 days = 73 days

3) DIO (Days Inventory outstanding) = (Inventory / Cost of goods sold) x 365 days = (600 / 4500) x 365 days = 49 days

Total time an inventory order is received until payment is received = DSO + DIO = 78 days + 49 days = 127 days

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

5) DSO = (Accounts receivable / Sales) x 365 days

or, (78 - 6) = (Accounts receivable / 7000) x 365

or, Accounts receivable = 7000 x 72 / 365 = 1,381 millions

Change in Accounts Receivable = 1381 - 1500 = - 119

answered by: anonymous