Question

Leyton Lumber Company has sales of $12 million per year, all on credit terms calling for payment within 30 days, and its accounts receivable are $1.5 million. What is Leyton’s DSO, what would it be if all customers paid on time, and how much capital would be released if Leyton could take action that led to on-time payments?

Answer 1

Solution and Explanation:

The following formula is used in order to calculate the days sales outstanding:

Days sales out standing = ( Accounts receivable divided by Sales )  multiply with 365

= $1.5 million divided by $12 million multiply with 365

After calculating we get, 45.625 days

In order to calculate the capital released, the following formula is used:

$Capital released = Sales * (DSO - Credit period) / 365$

$=\ 12 \text { million } *(45.625-30) / 365$

= 513699

Therefore, the capital released is $513699