Question

Leyton Lumber Company has sales of $8 million per year, all on credit terms calling for payment within 30 days, and its accounts receivable are $1.6 million. Assume 365 days in year for your calculations.

What is Leyton's DSO? Round your answer to two decimal places.

What would DSO be if all customers paid on time? Round your answer to two decimal places.

How much capital would be released if Leyton could take actions that led to on-time payments? Round your answer to the nearest cent. Write out your answer completely. For Example, 13.2 million should be entered as 13,200,000.

Answer 1

Information provided:

Sales= $8 million per year

Accounts receivables= $1.6 million

1.Days of sales outstanding= 365/Receivables turnover

Receivables turnover= Annual sales/Average receivables

                                         = $8,000,000/ $1,600,000

                                         = 5

Days of sales outstanding= 365/ 5

                                                 = 73 days.

2.If all customers paid on time, the DSO will be 30 days.

3.If customers paid on time, the accounts receivables is:

= 30*$8,000,000/365

= $657,534.25.

Therefore, the cash freed up= $1,600,000 - $657,534.25

                                             = $942,465.75.

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