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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

DSO AND ACCOUNTS RECEIVABLE Ingraham Inc. currently has $205,000 in accounts receivable, and its days sales outstanding (DSO) is 71 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 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 55 days to 51 days.

Days Sales Outstanding (DSO):

It is also known as the average collection period, it represents the time period a firm will take to collect its receivables. DSO is determined by dividing receivables to annual sales per day.

Explanation

Annual new sale is $895,792.25 (working note).

Days sales outstanding (reduced) is 51days (given).

Formula to calculate receivables,

Account receivables=Days sales outstanding×Annual sales365

Substitute $895,792.25 for annual sales and 51 for Days sales outstanding in above formula.

Account receivables=51days×$895,792.25365days=51days×$2454.225=$125,165.48

Working notes:

Compute annual sales.

Given,

Account receivable is $205,000

Days sales outstanding is 71days.

Sales:

The formula to calculate Days sales outstanding is,

Days Sales Outstanding=Account ReceivableAnnual Sales/365

Substitute $205,000 for accounts receivable and 71 for Days sales outstanding in above formula

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