In: Finance
RECEIVABLES INVESTMENT
Leyton Lumber Company has sales of $12 million per year, all on credit terms calling for payment within 30 days, and its accounts receivable are $2.4 million. Assume 365 days in year for your calculations.
What is Leyton's DSO? Round your answer to two decimal
places.
days
What would DSO be if all customers paid on time? Round your
answer to two decimal places.
days
How much capital would be released if Leyton could take actions
that led to on-time payments? Round your answer to the nearest
cent. Write out your answer completely. For Example, 13.2 million
should be entered as 13,200,000.
$
By definition, days sales outstanding (also known as DSO and days receivables) is a calculation used by a company to estimate their average collection period. It is a financial ratio that illustrates how well a company's accounts receivables are being managed.
Q1. Leyton's DSO = 73 days
DSO = Receivables/(Annual sales/365)
DSO = 2.4 mil/(12mil/365) = 2.4mil/0.03288mil = 73 days
Q2. DSO if all customers paid on time = 6 days
If all customerspaid on time, it would be:
DSO = Receivables/ (Annual sales/30)
DSO = 2.4mil/(12mil/30) = 2.4mil/0.4mil = 6 days
Q3. If Leyton could take action that led to on-time payments, capital would be release = $986,301.37
If Leyton could take action that led to on-time payments, capital would be release would be equal to the accounts receivable
Accounts Receivable = Sales per day * length of collection period = (12mil/365) * 30 = 0.98630137 mil
Hence, the amount released would be $986,301.37