Question

4. Financial ratios in the forecasting process Atlantic Northern Inc. currently has $620,000 in accounts receivable and generated $4,440,000 in sales (all on credit) during the year that just ended. The firm's days sales outstanding (DSO) is days. Use 365 days as the length of a year in all calculations. Atlantic Northern Inc.'s CFO is unhappy with its DSO and wants to improve collections next year. Sales are expected to grow by 16% next year, and the CFO wants to lower the DSO to the industry average of 30 days. How much accounts receivable is the firm expected to carry? $486,819 O $423,321 O $465,653 O $444,487

Answer 1

1.

$DSO = \frac{\textup{Accounts receivable}}{\textup{Total credit sales}}*\textup{No. of days}$

putting the values

$DSO = \frac{\textup{620000}}{\textup{4440000}}*\textup{365}$

$DSO = 50.968468$

$\bg_green \large DSO =\textup{ 51 days}$

2.

We can rewrite the DSO equation to find the account receivable for given level of Sales and DSO.

$\textup{Accounts receivable} = \frac{\textup{DSO*Total Sale}}{365}$

putting the value

$\textup{Accounts receivable} = \frac{\textup{30*4440000*1.16}}{365}$

$\textup{Accounts receivable} = 423,320.5479$

$\bg_green \large \textup{Accounts receivable} = \$423,321$

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.