Question

Receivables Investment

Snider Industries sells on terms of 3/10, net 25. Total sales for the year are $990,000. Thirty percent of customers pay on the 10th day and take discounts; the other 70% pay, on average, 30 days after their purchases. Assume 365 days in year for your calculations.

What is the days sales outstanding? Round your answer to one decimal place. _____ days

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

What would happen to average receivables if Snider toughened its collection policy with the result that all nondiscount customers paid on the 25th day? Round your answer to the nearest dollar. Do not round intermediate calculations.

Answer 1

Solution.

What is the days sales outstanding?

Account receivable / (Total credit sales / Number of day's)

DSO = (30%x10) + (70% x 30)

DSO = 3 + 21 = 24 Days.

What is the average amount of receivables?.

Account receivable = (DSO x sales) / 365

= (24 x $990,000) / 365

= $65,095.89.

What would happen to average receivables if Snider toughened its collection policy with the result that all nondiscount customers paid on the 25th day?

Updated days of sales outstanding =

DSO = (30%x10) + (70% x 25)

DSO = 3 + 17.5 = 20.5 Days.

Account receivable = (DSO x sales) / 365

= (20.5 x $990,000) / 365

= $55,602.74.

Due to it account receivable will be reduced by $9,493.15.