Question

Victoria Enterprises has $1.6 million of accounts receivable. The company's DSO is 40, its current assets are $2.5 million, and its current ratio is 1.5. The company plans to reduce its DSO to the industry average of 30 without causing a decline in sales. The freed-up cash will be used to reduce current liabilities. If the company succeeds, what will Victoria's new current ratio be?

Answer 1

Answer:

1.26

Explanation:

Current ratio=1.5

DSO=40

DSO=Net sales/Average Accounts receivable

40=(Average Accounts receivable/Net sales)*365

1,600,000/(40/365)=Net sales

Net sales=$14,600,000

Revised DSO=30

(30/365)=Average Accounts Receivable-revised/$14,600,000

Average Accounts Receivable-revised=$1,200,000

Current Assets-Old Receivables+New Receivables= $2,500,000-1,600,000+1,200,000=$2,100,000

Current liabilities=2,500,000/1.5

Current liabilities=$1,666,667

Revised current ratio=$2,100,000/1,666,667

Revised Current ratio=1.26