Question

Receivables Investment

Snider Industries sells on terms of 2/10, net 45. Total sales for the year are $1,100,000. Thirty percent of customers pay on the 10th day and take discounts; the other 70% pay, on average, 50 days after their purchases. Assume a 365-day year.

1. What is the days sales outstanding? Do not round intermediate calculations. Round your answer to the nearest whole number.

     days

2. What is the average amount of receivables? Do not round intermediate calculations. Round your answer to the nearest dollar.

   $  

3. What would happen to average receivables if Snider toughened its collection policy with the result that all nondiscount customers paid on the 45th day? Do not round intermediate calculations. Round your answer to the nearest dollar.

   $  

Answer 1

a. The days sales outstanding is computed as shown below:

= 30% x 10 days + 70% x 50 days

= 38 days

b. Average amount of receivable is computed as shown below:

= 38 days x Sales / 365

= 38 x $ 1,100,000 / 365

= $ 114,521 Approximately

c. The amount is computed as shown below:

New DSO is computed as follows:

= 30% x 10 days + 70% x 45 days

= 34.5 days

New accounts receivables is computed as follows:

= New DSO x Sales / 365

= 34.5 days x $ 1,100,000 / 365

= $ 103,973 Approximately

So, the change in accounts receivables is computed as follows:

= $ 114,521 - $ 103,973

= $ 10,548

Feel free to ask in case of any query relating to this question