Question

RECEIVABLES INVESTMENT

Leyton Lumber Company has sales of $12 million per year, all on credit terms calling for payment within 30 days, and its accounts receivable are $1.8 million. Assume 365 days in year for your calculations.

1. What is Leyton's DSO? Round your answer to two decimal places.
               days
2. 
   
3. What would DSO be if all customers paid on time? Round your answer to two decimal places.
             days
4. 
   
5. How much capital would be released if Leyton could take actions that led to on-time payments? Round your answer to the nearest cent. Write out your answer completely. For Example, 13.2 million should be entered as 13,200,000.
                $

Answer 1

Value of sales = $12 million per year = $12,000,000 per year

Credit terms = 30 days

Amount of account receivables = $1.8 million = $1,800,000

Days of sales outstanding (DSO) = (Average receivables per year) * 365 / (Average Sales per year)

(a)

Substituting in DSO formula,

Days of sales outstanding (DSO) = 1,800,000*365/12,000,000

Days of sales outstanding (DSO) = 54.75 days

(b)

Since the credit terms calling for payments is 30 days, all the customers would pay in 30 days

If the customers paid on time, then the firm's DSO = 30 days

(c)

Account receivables if the customers paid on time will be calculated as average account receivable per day * 30 days

Account receivables if the customers paid on time = 30*12,000,000/365 = $986,301.36

Cash released = Account receivables - Account receivables if the customers paid on time

Cash released = $1,800,000-$986,301.36 = $813,698.64