In: Finance
A firm’s annual credit sales are $1.34 million, with 51% of its daily average paid out in purchases. It usually takes the company 30 days to meet its purchasing obligations. This payment pattern has not changed in recent years. However, the firm’s commitment to accounts receivable has shifted based on its current annual net income of $28k which meets the 2.3% required return, anticipated by senior management a year earlier. Normally, the firm collects its accounts in 24 days, an average which remains unaffected. Note: Note: The term “k” is used to represent thousands (× $1,000). Required: In percentage terms, by how much are the firm’s receivables greater than its payables? Answer % Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places (for example: 28.31%). Use a 360-day year.
Using the days in accounts receivable we can calculate the firm's receivables | ||||
Days in accounts receivable | Accounts receivable/Credit sales per day | |||
24 | Accounts receivable/(1340000/360) | |||
24 | Accounts receivable/3722.22 | |||
Accounts receivable | 24*3722.22 | |||
Accounts receivable | $89,333.33 | |||
Purchases | 1340000*51% | |||
Purchases | $683,400 | |||
Accounts payable | Payable period*Purchases per day | |||
Accounts payable | 30*(6834000/360) | |||
Accounts payable | 30*1898.33 | |||
Accounts payable | $56,950.00 | |||
Amount by which accounts receivable is higher than payable | 89333.33-56950 | |||
Amount by which accounts receivable is higher than payable | $32,383.33 | 0.5686275 | ||
% firm's receivables higher than payable | 32383.33/56950 | |||
% firm's receivables higher than payable | 56.86% | |||
Thus, accounts receivable are 56.86% higher than accounts payable | ||||