Question

Ingraham Inc. currently has $910,000 in accounts receivable, and its days sales outstanding (DSO) is 72 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 25%. 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

If DSO is 72 days:

Days Sales Outstanding = 365 * Accounts Receivable / Annual Sales
72 = 365 * $910,000 / Annual Sales
Annual Sales = $179,506.85

If DSO is 35 days:

Annual Sales = $179,506.85 - 25% * $179,506.85
Annual Sales = $134,630.1375

Days Sales Outstanding = 365 * Accounts Receivable / Annual Sales
35 = 365 * Accounts Receivable / $134,630.1375
Accounts Receivable = $12,909.74

So, accounts receivable will decrease to $12,909.74 if new policy is adopted.