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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

RECEIVABLES INVESTMENT McEwan Industries sells on terms of 3/ 10, net 30. Total sales for the year are $1,921,000; 40% of the customers pay on the 10th day and take discounts, while the other 60% pay, on average, 70 days after their purchases.

  1. a. What is the days sales outstanding?
  2. b. What is the average amount of receivables?
  3. c. What is the percentage cost of trade credit to customers who take the discount?
  4. d. What is the percentage cost of trade credit to customers who do not take the discount and pay in 70 days?
  5. e. What would happen to McEwan's accounts receivable if it toughened up on its collection policy with the result that all nondiscount customers paid on the 30th day?

a.

Summary Introduction

To determine: The day sales outstanding.

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 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.

Cost of Trade Credit: The trade credit refers to the credit sale. This credit owes money for the seller, so it is treated as accounts receivable by the seller and this money is accounted as accounts payable by the buyer.

Explanation

Given information:

The value of sales is $1,921,000 for the year.

40% of the customers pay on the 10th day (to avail 3% discount).

60% of the customers pay on average, 70 days after their purchase.

Calculation of the days of sales outstanding:

The formula to calculate the days of sales outstanding is,

Daysofsalesoutstanding=40%×Days+60%×Days

Substitute 10 for the 40% of customers pay after days and 70 for the 60% of customer days in the above formula

b.

Summary Introduction

To determine: The average amount of receivables.

c.

Summary Introduction

To determine: The percentage of the cost of trade credit.

d.

Summary Introduction

To determine: The percentage of the cost of credit to customers who do not take a discount.

e.

Summary Introduction

To determine: The change in collection policy if all non-discount customers paid on the 30th day.

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