Question

Faldo Corp sells on terms that allow customers 45 days to pay for merchandise. Its sales last year were $325,000, and its year-end receivables were $60,000. If its DSO is less than the 45-day credit period, then customers are paying on time. Otherwise, they are paying late. By how much are customers paying early or late? Base your answer on this equation: DSO - Credit Period = Days early or late, and use a 365-day year when calculating the DSO. A positive answer indicates late payments, while a negative answer indicates early payments. Assume all sales to be on credit. Do not round your intermediate calculations.

Answer 1

Answer:

The difference is 22.34 days which results in late payments

Explanation:

For computing the DSO we have to compute the accounts receivable turnover ratio which is shown below:

Accounts receivable turnover ratio  = Credit sales ÷ average accounts receivable

= $325,000 ÷ $60,000

= 5.42 times

and the average collection period in days = Total number of days in a year ÷ accounts receivable turnover ratio

= 365 days ÷ 5.42 times

= 67.34 days

Actual credit period is given is 45 days

But the resulted days are 67.34 days

So, the difference is 22.34 days which results in late payments