Question

Problem 16-06

Receivables Investment

Snider Industries sells on terms of 3/10, net 45. Total sales for the year are $1,680,000. Thirty percent of customers pay on the 10th day and take discounts; the other 70% pay, on average, 50 days after their purchases. Assume 365 days in year for your calculations.

What is the days sales outstanding? Round your answer to one decimal place.

(    )days

What is the average amount of receivables? Round your answer to the nearest dollar. Do not round intermediate calculations.

$ ( )

What would happen to average receivables if Snider toughened its collection policy with the result that all nondiscount customers paid on the 45th day? Round your answer to the nearest dollar. Do not round intermediate calculations.

$ ( )

Answer 1

Answer a.

30% of customers pay within 10 days and remaining 70% pay on 50 days after their purchases

Days Sales Outstanding = 30% * 10 + 70% * 50
Days Sales Outstanding = 38 days

Answer b.

Days Sales Outstanding = 365 * Average Receivable / Annual Sales
38 = 365 * Average Receivable / $1,680,000
Average Receivable = $174,904.11

Answer c.

30% of customers pay within 10 days and remaining 70% pay on 45 days after their purchases

Days Sales Outstanding = 30% * 10 + 70% * 45
Days Sales Outstanding = 34.50 days

Days Sales Outstanding = 365 * Average Receivable / Annual Sales
34.50 = 365 * Average Receivable / $1,680,000
Average Receivable = $158,794.52

Average receivable will decrease by $16,109.59 ($174,904.11 - $158,794.52)