Question

Ingraham Inc. currently has $945,000 in accounts receivable, and its days sales outstanding (DSO) is 61 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 15%. 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 dollar Grade It Now Save & Continue The Stewart Company has $2,066,000 in current assets and $785,080 in current liabilities. Its initial inventory level is $516,500, and it will raise funds as additional notes payable and use them to increase inventory. How much can its short-term debt (notes payable) increase without pushing its current ratio below 2.0? Round your answer to the nearest dollar. Grade It Now Save & Continue

Please answer those question answer.

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Answer 1

Solution:-

(a)

Days sales outstanding= 61 days

(Accounts receivables/Sales)*365= 61 days

(945,000/Sales)*365 = 61

Sales= $5,654,508.2

If the days sales outstanding is reduced to 35 days, it will decline sales by 15% and the new sales level will be as follows:

Revised sales= $5,654,508.2*(1-15%)= $4,806,332

Following the change of DSO to 35 days, the level of accounts receivable is calculated as follows using the DSO formula:

(Accounts receivables/Sales)*365= 35 days

(Accounts receivables/$4,806,332)*365= 35

Accounts receivables= $460,881

(b)

Existing Current ratio= current assets/current liabilities = 2,066,000/785,080 = 2.63 times

Now, the company plans to issued short-term notes payable to invest further in inventories. Thus, the said investment will increase both the current assets and current liabilities as inventories will go up alongwith short-term debt.

Let's say that the increase in short-term debt without pushing current ratio below 2.0 is $x. therefore, the following equation would hold true:

Revised current assets/Revised current liabilities= 2

(Existing current assets + x)/(Existing current liabilities + x) = 2

(2,066,000 + x)/(785,080 + x)= 2

2,066,000 + x= 1,570,160 + 2x

x= 2,066,000-1,570,160

x= $495,840

Thus, its notes payable can be increased by $495,840 to fund inventories without pushing the current ratio below 2.