Question

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.

Answer 1

Answer:

$125,165.49

Explanation:

Daily Sales Outstanding is computed by dividing Average Accounts Receivable over Daily Credit Sales.

In this case, if the DSO is 71, then the Daily Credit Sale is $2,887.3239($205,000/71).

Then, the old sales is $1,053,873.24 ($2887.3239 x 365).

If this is reduced by 15% after the policy is implemented, the new sales is $895,792.25 ($1,053,873.23-15%) and the new daily sales is $2,454.23 ($895,792.25/365).

Using these DSO formula, the new Accounts Receivable level will be $125,165.49 (51 x $2,454.23).