Question

The asset side of the 2016 balance sheet for Leggett & Platt (a furniture manufacturer) follows. The company reported net sales of $3,749.9 million in 2016 and $3,917.2 million in 2015. Use this information to answer the requirements:

LEGGETT & PLATT, INCORPORATED Consolidated Balance Sheets (excerpts)
(in millions)	Dec. 31, 2016	Dec. 31, 2015
Current Assets
Cash and cash equivalents	$281.9	$ 253.2
Trade receivables, net of allowance $7.2 and $9.3, at December 31, 2016 and 2015, respectively	450.8	448.7
Other receivables, net	35.8	71.5
Total receivables, net	486.6	520.2
Inventories
Finished goods	255.7	242.8
Work in process	52.6	42.6
Raw materials and supplies	245.1	241.8
LIFO reserve	(33.8)	(22.6)
Total inventories, net	519.6	504.6
Prepaid expenses and other current assets	36.8	33.2
Total current assets	1,324.9	1,311.2
Property, plant and equipment – at cost
Machinery and equipment	1,133.8	1,099.1
Buildings and other	559.4	548.2
Land	37.7	40.0
Total property, plant and equipment	1,730.9	1,687.3
Less accumulated depreciation	(1,165.4)	(1,146.5)
Net property, plant and equipment	565.5	540.8

Table continued

LEGGETT & PLATT, INCORPORATED Consolidated Balance Sheets (excerpts)—continued
(in millions)	Dec. 31, 2016	Dec. 31, 2015
Other Assets
Goodwill	791.3	806.1
Other intangibles, less accumulated amortization of $137.0 and $139.8 at December 31, 2016 and 2015, respectively	164.9	188.4
Sundry	137.5	117.2
Total other assets	1,093.7	1,111.7
Total assets	$2,984.1	$2,963.7

Required:

a. Compute the accounts receivable turnover for 2016 and 2015. At December 31, 2014, accounts and other receivables, net were $523.3 million.

b. Compute the days sales outstanding (DSO) for each year.

c. If a Target is set to reduce DSO by 10 days, how much ($) would Accounts receivable be reduced by?

Answer 1

a)
Accounts receivable turnover ratio for 2016 = Net credit sales / average accounts receivable
= $3,749.9 / ((486.6 + 520.2) / 2)
= 7.4491 or 7.45

Accounts receivable turnover ratio for 2015 = Net credit sales / average accounts receivable
= 3,917.2 / ((520.2 + 523.3) / 2)
= 7.5078 or 7.51

b)
Days sales outstandings for 2016= 365 / Accounts receivable turnover
= 365 / 7.4491
= 48.9989 days or 49.00 days

Days sales outstandings for 2015= 365 / Accounts receivable turnover
= 365 / 7.5078
= 48.6160 days or 48.62 days

c)
For 2016:

DSO = Average accounts receivable / (credit sales / 365)
(49 - 10) = Average accounts receivable / ($3,749.9 / 365)
39 = Average accounts receivable / 10.2737

Average accounts receivable = 10.2737 * 39 = $400.66

Average accounts receivable would be reduced by = ((486.6 + 520.2) / 2) - $400.66 = $102.74