Question

The Abaco Company, a small charter airline began operations on Jan 1. It mostly provides package delivery to islands in the Bahamas. Its credit sales for the first 6 months of operations were as follows

Month	Credit Sales for Month
Jan	$150,000
Feb	$250,000
Mar	$275,000
Apr	$325,000
May	$420,000
Jun	$525,000

Throughout this entire period, the firms credit customer maintained a constant pattern. 25% paid in the month of sales, 40% paid in the first month following the sale, and 35% paid in the second month following the sale.

A) What was Abaco's receivables balance at the end of March and the end of June?

B) Assume 90 days per calendar quarter. What were the cumulative average daily sales (ADS) and days sales outstanding (DSO) for the first half year?

Answer 1

Answer to Part A:

First Quarter:

Ending Accounts Receivable = 35% of February Sales + 75% of March Sales
Ending Accounts Receivable = 35% * $250,000 + 75% * $275,000
Ending Accounts Receivable = $293,750

Second Quarter:

Ending Accounts Receivable = 35% of May Sales + 75% of June Sales
Ending Accounts Receivable = 35% * $420,000 + 75% * $525,000
Ending Accounts Receivable = $540,750

Answer to Part B:

First Quarter:

Total Sales = January Sales + February Sales + March Sales
Total Sales = $150,000 + $250,000 + $275,000
Total Sales = $675,000

Daily Sales = Total Sales / 90
Daily Sales = $675,000 / 90
Daily Sales = $7,500

Days Sales Outstanding = Accounts Receivable / Daily Sales
Days Sales Outstanding = $293,750 / $7,500
Days Sales Outstanding = 39.17 days

Second Quarter:

Total Sales = April Sales + May Sales + June Sales
Total Sales = $325,000 + $420,000 + $525,000
Total Sales = $1,270,000

Daily Sales = Total Sales / 90
Daily Sales = $1,270,000 / 90
Daily Sales = $14,111.1111

Days Sales Outstanding = Accounts Receivable / Daily Sales
Days Sales Outstanding = $540,750 / $14,111.1111
Days Sales Outstanding = 38.32 days