Question

Part 2: Receivables Investment

In addition to your solution to each computational problem in this part of your assessment, you must show the supporting work leading to your solution to receive credit for your answer.

If you choose to solve the problems algebraically, be sure to show your computations.

If you use a financial calculator, show your input values.

If you use an Excel spreadsheet, show your input values and formulas.

XYZ Inc. sells on terms of 2/10, net 30. Total sales for the year are $1,000,000. Consider that 30 percent of the customers take discounts and pay on the 10th day, while the other 70 percent pay, on average, 45 days after their purchases.

What is the days' sale outstanding?

Determine the average amount of receivables.

For the customers who take the discount, what is the percentage cost of trade credit?

For the customers who do not take the discount and pay in 45 days, what is the percentage cost of trade credit?

What would happen to XYZ's accounts receivable if it created a new collection policy that required all non-discount customers to pay on the 30th day?

Answer 1

What is the days' sale outstanding?

Answer: Days sales Outstanding (DSO)= Accounts Receivable / Average sales per day

Accounts Receivable = 70% of $1,000,000 = $700,000

Average sales per day = $1,000,000/365 = $2739.73

DSO = 700,000/2739.73 = 255.50

Determine the average amount of receivables.

Answer: Average Amount of Receivables = Receivables/45

Receivables = 700000

Average Amount of Receivables = 700,000/45 = 15,555.55

For the customers who take the discount, what is the percentage cost of trade credit?

Answer: As given in the question the terms of 2/10.

It means, if the customers pay within 10 days, they are entitled for a 2% discount on trade credit.

Thus the Answer is 2% on trade credit.

For the customers who do not take the discount and pay in 45 days, what is the percentage cost of trade credit?

Answer: For the customers who do not take discount and pay in 45 days.

The cost percentage of Trade Credit = 45 * 2/10 = 9%

What would happen to XYZ's accounts receivable if it created a new collection policy that required all non-discount customers to pay on the 30th day?

If a new collection policy is made requiring all non-discount customeres to pay on the 30th day.

Accounts receivable would be = 700000/30 = $23,333.33