Question

Ingraham Inc. currently has $880,000 in accounts receivable, and its days sales outstanding (DSO) is 47 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

Current accounts receivable => $880,000

Days sales outstanding (DSO) is the average number of days that it takes for a company to collect payment on its credit sales.

Days Sales outstanding = Accounts receivable * no of days in a period / (Total credit sales)

Current days sales outstanding = 47 days

47 = $880,000 * 365 / Current total credit sales

Current total credit sales => $6,834,042.5532

After reducing days sales outstanding to 35 days, average sales are expected to fall by 5%

So, expected total credit sales => $6,834,042.5532 * 95% => $6,492,340.4255

Revised Accounts receivable = Revised Days sales outstanding * Revised Total credit sales / 365

=> 35 * $6,492,340.4255‬ / 365

=> $622,553.19

The new level of accounts receivable following the change of DSO to 35 days is $622,553.19