Question

1. Define the following terms and explain how each is affected by sales fluctuations:

   • Days sales outstanding (DSO) -

   • Aging schedule –

2. What are accruals? How much control do managers have over accruals?

3. Define each of the following terms

   • Trade credit –

   • Free trade credit –

   • Costly trade credit –

Answer 1

A. Days sales outstanding will be reflecting the overall days of accounting receivables which will be reflecting the ability of the company in order to collect their debtors because it will be reflecting the duration during which debtors are not collected by the company and it can impact the cash flows. When there will be higher sales, there will be higher days sales outstanding.

B. Aging schedule will be reflecting the schedule of collection of the debtors in the company and it will be reflecting the time period and the dates on which the debts are collected

2. Accruals are reflecting that services are received or delivered by the company but the cash has not been paid or received. The managers are having a lower control on the accruals because it is reflecting the credits outstanding. Managers can have control on payables related to accruals.

3. trade credit is the credit which will be reflected in the normal trading durations of the company and it is related to day to day business

free trade credit is trade credit which is freely available to the company is the normal course of business

costly trade credit will mean that when the restrictions are there and very high cost are incurred while obtaining of the trade credit