Question

Problem 16-06
Receivables Investment

Snider Industries sells on terms of 3/10, net 25. Total sales for the year are $1,160,000. 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

(a)- Days sales outstanding (DSO)

Days sales outstanding (DSO) = [Number of days in discount period x percent of the customers pay] + [Non-discount period x percent of the customers pay]

= [10 Days x 30%] + [30 Days x 70%]

= 3.0 Days + 21.0 Days

= 24.0 Days

“Days sales outstanding = 24.0 Days”

(b)- Average amount of receivables

Sales per day = $3,178.08 per day [$11,60,000 / 365 Days]

Average amount of receivables = Sales per day x Days sales outstanding (DSO)

= $3,178.08 per day x 24.0 Days

= $76,274

“Average amount of receivables = $76,274”

(c)-Change in average receivables if the snider toughened its collection policy with the result that all non-discount customers paid on the 25^th day

Days sales outstanding (DSO) = [Number of days in discount period x percent of the customers pay] + [Non-discount period x percent of the customers pay]

= [10 Days x 30%] + [25 Days x 70%]

= 3.0 Days + 17.5 Days

= 20.5 Days

Sales per day = $3,178.08 per day [$11,60,000 / 365 Days]

Average amount of receivables = Sales per day x Days sales outstanding (DSO)

= $3,178.08 per day x 20.5 Days

= $65,151

“If Snider toughened its collection policy with the result that all non-discount customers paid on the 25^th day, then the average receivables would reduce to $65,151 from $76,274”