Question

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.
$

Answer 1

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