Question

Receivables Investment McEwan Industries sells on terms of 3/10, net 30. Total sales for the year are $1,921,000; 40% of the customers pay on the 10th day and take discounts, while the other 60% pay, on average, 70 days after their purchases. What is the days sales outstanding? .40 * 10 + .60 * 70 4 + 42 days days sales outstanding = 46 days What is the average amount of receivables? 1,921,000*46/365 $242,098.63 What is the percentage cost of trade credit to customers who take the discount? .03*365 / .97x20 56.44% What is the percentage cost of trade credit to customers who do not take the discount and pay in 70 days? .03*365 / .97x60 18.8% What would happen to McEwan’s accounts receivable if it toughened up on its collection policy with the result that all nondiscount customers paid on the 30th day?

Answer 1

a) Days sales outsanding = 40% x 10 + 60% x 70 =	46	Days
b) Sales per day  = 1,921,000/365 =	$     5,263.01
Average amount of receivables = $5,263.01 x 46	$ 242,098.63
c) Percentage cost of trade credit to customers who take the discount: (1 + (.03 / .97)) ^(365/20) – 1 =	74.35%
d) Percentage cost of trade credit to customers who do not take the discount and pay in 70 days: (1 + (.03 / .97)) ^(365/60) – 1 =	20.36%
e)
Days sales outsanding = 40% x 10 + 60% x 30 =	22	Days
Sales per day  = 1,921,000/365 =	$     5,263.01
Average amount of receivables = $5,263.01 x 22	$ 115,786.30
As a result of the tighter credit, sales could decline reducing receivables. Customers who now take the discount can further reduce the amount of receivables.