Question

Receivables Investment

Snider Industries sells on terms of 3/10, net 25. Total sales for the year are $1,840,000. Thirty percent of customers pay on the 10th day and take discounts; the other 70% pay, on average, 30 days after their purchases. Assume 365 days in year for your calculations.

1. What is the days sales outstanding? Round your answer to one decimal place.
   days
   
2. What is the average amount of receivables? Round your answer to the nearest dollar. Do not round intermediate calculations.
   $
   
3. What would happen to average receivables if Snider toughened its collection policy with the result that all nondiscount customers paid on the 25th day? Round your answer to the nearest dollar. Do not round intermediate calculations.
   $

Answer 1

Answer a.

30% of customers pay within 10 days and remaining 70% pay on 30 days after their purchases

Days Sales Outstanding = 30% * 10 + 70% * 30
Days Sales Outstanding = 24 days

Answer b.

Days Sales Outstanding = 365 * Average Receivable / Annual Sales
24 = 365 * Average Receivable / $1,840,000
Average Receivable = $120,986.30

Answer c.

30% of customers pay within 10 days and remaining 70% pay on 25 days after their purchases

Days Sales Outstanding = 30% * 10 + 70% * 25
Days Sales Outstanding = 20.50 days

Days Sales Outstanding = 365 * Average Receivable / Annual Sales
20.50 = 365 * Average Receivable / $1,840,000
Average Receivable = $103,342.47

Average receivable will decrease by $17,643.83 ($120,986.30 - $103,342.47)