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

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter22: Providing And Obtaining Credit

Section: Chapter Questions

Problem 4MC

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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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