Answered: Ingraham Inc. currently has $500,000 in…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Ingraham Inc. currently has $500,000 in accounts receivable, and its days sales outstanding (DSO) is 44 days. It wants to reduce its DSO to 20 days by pressuring more of its customers to pay their bills on time. If this policy is adopted, the company's average sales will fall by 10%. What will be the level of accounts receivable following the change? Assume a 365-day year. Do not round intermediate calculations. Round your answer to the nearest cent

Expert Solution

Step 1

$Formula of Days sales outstanding is as follows :$

$Days sales outstanding = \frac{Average accounts receivable}{Net credit sales} \times 365$

$Computation of Net credit sale is as follows :$

$\begin{array}{rcl} 44 & = & \frac{$ 500000}{Net credit sales} \times 365 \\ Net credit sales & = & \frac{$ 500000}{44} \times 365 \\ = & 4147727.27 \end{array}$

$\begin{array}{rcl} New credit sales after DSO fall & = & $ 4147727.27 \times (1 - 10 %) \\ = & 3732954.545 \end{array}$

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