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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

DSO AND ACCOUNTS RECEIVABLE Harrelson Inc. currently has $750,000 in accounts receivable, and its days sales outstanding (DSO) is 55 days. It wants to reduce its DSO to 35 days by pressuring more of its customers to pay their bills on time. If this policy adopted, the company’s average sales will fall by 15%. What will be the level of accounts receivable following the change? Assume a 365-day year.

Summary Introduction

To identify: The level of accounts receivable, if the average falls by 15% and DSO is reduced from 55days to 51 days.

Days Sales Outstanding: Days sales outstanding are used to measure days that a business usually requires to collects its receivable in average. It indicates account receivable of the firm and firm’s efficiency in collecting the account receivable.

Explanation

Solution:

Given,

Annual sale is $4,230,681.

Days sales outstanding is 51days.

The formula to calculate Days sales outstanding is,

Days Sales Outstanding=Account ReceivableAnnual Sales/365

Substitute $4,230,681 for annual sales and 51 for Days sales outstanding in above formula.

51days=Account ReceivablesAnnual Sales/365$4,230,681365=Account Receivables51$11,590=Accounts Receviables51Account Receivable=$591,090

Thus, accounts receivables is 591,090.

Working notes:

Compute annual sales.

Given,

Account receivable is $750,000

Days sales outstanding is 35days.

The formula to calculate Days sales outstanding is,

Days Sales Outstanding=Account ReceivableAnnual Sales/365

Substitute $750,000 for account receivable and 35 for Days sales outstanding in above formula

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