Question

Ingraham Inc. currently has $915,000 in accounts receivable, and its days sales outstanding (DSO) is 45 days. It wants to reduce its DSO to 20 days by pressuring more of its customers to pay their bills on time. If this policy is adopted, the company's average sales will fall by 25%. What will be the level of accounts receivable following the change? Assume a 365-day year. Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

If DSO is 45 days:

Accounts Receivable = $915,000

DSO = 365 * Accounts Receivable / Annual Sales
45 = 365 * $915,000 / Annual Sales
Annual Sales = $7,421,667

If DSO is 20 days:

Fall in sales = 25%

New Annual Sales = $7,421,667 * (1 - 0.25)
New Annual Sales = $5,566,250

DSO = 365 * Accounts Receivable / Annual Sales
20 = 365 * Accounts Receivable / $5,566,250
Accounts Receivable = $305,000

So, if DSO is reduced to 20 days then level of accounts receivable will decrease to $305,000