Question

Riordan Trucking has sales of $18M and an accounts receivable balance of $1M. The firm has projected next year's sales at $24M and wants to reduce ACP by 2 days. Calculate Riordan's projected accounts receivable balance. (Round to the nearest $ and assume 360 days.)

a. $1.0M

b. $1.2M

c. $1.4M

d. $1.6M

Answer 1

Option (b) is correct

First we will calculate the accounts receivable turnover and then we will calculate the average collection period (ACP).

Accounts receivable turnover = Sales / Accounts receivable

Sales = $18M

Accounts receivable = $1M

Accounts receivable turnover = $18M / $1M = 18

Average collection period is given by:

Average collection period = 360 / Accounts receivable turnover

Average collection period = 360 / 18 = 20 days

Now, the company wants to reduce ACP by 2 days, so,

New ACP = 20 -2 = 18 Days

New sales = $24M

As per the formula, ACP is

ACP = 360 / Accounts receivable turnover

Putting the new or changed values in the above equation, we get,

18 = 360 / Accounts receivable turnover

New Accounts receivable turnover = 360 / 18 = 20

Now,

Accounts receivable turnover is given by:

Accounts receivable turnover = Sales / Accounts receivable

Putting the new or changed values in the above equation, we get,

20 = $24M / Accounts receivable

Accounts receivable = $24M / 20 = 1.2M