Question

DSO AND ACCOUNTS RECEIVABLE Ingraham Inc. currently has $410,000 in accounts receivable, and its days sales outstanding (DSO) is 48 days. It wants to reduce its DSO to 35 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 5%. What will be the level of accounts receivable following the change? Assume a 365-day year. Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

Solution:
	Level of Accounts receivable after change	284010.42
Working notes:
Notes:	We will calculate current sales value using current DSO
	Current Days sales outstanding (DSO) = 48 days
	current Days sales outstanding (DSO) = (Accounts Receivable /(current Sales/365))
	48 = (410,000 /(Sales/365))
	Current sales = (410,000 /48) x 365
	Current sales = 3117708.333
	due to change in DSO 48 days to 35 days
	sales drop by 5%
	changed sales = Current sales x (1- 0.05)
	changed sales =3117708.333 x (1- 0.05)
	changed sales =3117708.333 x 0.95
	changed sales =2,961,822.916666
	Changed sales and Drop DSO 35 is used to get level of accounts receivable following the change.
	Changed Days sales outstanding (DSO) = (Accounts Receivable /(Changed Sales/365))
	35 = (Accounts Receivable /(2,961,822.916666/365)
	Accounts Receivable = 35 x (2,961,822.916666/365)
	Accounts Receivable = 284,010.4167
	Accounts Receivable = 284,010.42
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