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Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937

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Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937
Textbook Problem
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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 $13 million. What is Leyton’s DSO, what would it be if all customers paid on time, and how much capital would be released if Leyton could take action that led to on-time payments?

Summary Introduction

To determine: The day sales outstanding, the day sales outstanding in the case when customers are paid on time and the amount of capital released.

Introduction:

Receivables Investment:

The receivables are the cash, which the company owes from its customers. These are the cash which will be received from the customers, so that they are known as receivables. The investment of the receivables is known as the receivables investment. The company can earn a good value of return by investing the receivables.

Explanation

Given information:

The value of sales is $12 million per year.

The credit terms are 30 days.

The amount of accounts receivables is $1.5 million.

Calculation of the days of sales outstanding:

The formula to calculate the days of sales outstanding is,

Daysofsalesoutstanding=AccountsreceivablesAveragesales×365days

Substitute $1.5 million for accounts receivables and $12 million for average sales in the above formula.

Daysofsalesoutstanding=$1,500,000$12,000,000×365days=45.625days

The day of sales outstanding is 45.625 days or 46 days.

Calculation of the day sales outstanding when the customers are paid on time:

The formula to calculate the day sales outstanding is,

Daysofsalesoutstanding=AccountsreceivablesAveragesales×365days

Substitute $986,301.37 for the accounts receivables (refer working note) and $12 million for the average sales in the above formula.

Daysofsalesoutstanding=$986,301.37$12,000,000×365days=30days

The day of sales outstanding when customers are paid on time is 30 days

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