Sampson Orange Juice Company normally takes 30 days to pay for its average daily

Question

Sampson Orange Juice Company normally takes 30 days to pay for its average daily credit purchases of $7,800. Its average daily sales are $9,300, and it collects its accounts in 34 days.

What is its net credit position?

If the firm extends its average payment period from 30 days to 45 days (and all else remains the same), what is the firm’s new net credit position? (Negative answer should be indicated by a minus sign.)

Sampson Orange Juice Company normally takes 30 days to pay for its average daily credit purchases of $7,800. Its average daily sales are $9,300, and it collects its accounts in 34 days.

Explanation / Answer

Answer to Part a.

Net Credit Position = Accounts Receivable – Accounts Payable
Accounts Receivable = Average Daily Sales * Average Collection period
Accounts Receivable = $9,300 * 34 = $316,200

Accounts Payable = Average Daily Credit Purchases * Average Payment Period
Accounts Payable = $7,800 * 30 = $234,000

Net Credit Position = $316,200 - $234,000
Net Credit Position = $82,200

Answer to Part b.

Net Credit Position = Accounts Receivable – Accounts Payable
Accounts Receivable = $316,200

Accounts Payable = Average Daily Credit Purchases * Average Payment Period
Accounts Payable = $7,800 * 45 = $351,000

New Net Credit Position = $316,200 - $351,000
New Net Credit Position = -$34,800

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