Question

February 15, 2020 at 12:32 PM Weir Incorporated has sales of $220,000 and accounts receivable of $19,500. You can easily show that its DSO is well over the industry average of 27 days. Suppose that it speeds up collection, matches the industry average, and manages to earn 7% interest on the cash not tied up in receivables. What would be the savings per year? Assume that sales are not affected by the tighter credit. A)-$277.26 B)-225.82 C)-$244.04 D) -$256.44 E)-$296.44

Answer 1

The correct answer is B) -$225.82

Calculation

Firstly we have to calculate account receivable as per industry standard

= sales ×collection period/365

= 220000 × 27/365

= $ 16274

Saving per year = ( current account receivable- account receivable as per industry standard) × 7 %

= ( 19500 - 16274) × 7 %

= $ 225.82