Which of the following statements is CORRECT? Other things held constant, the hi

Question

Which of the following statements is CORRECT? Other things held constant, the higher a firm s days sales outstanding (DSO). the better its credit department If a firm that sells on terms of net 30 changes its policy to 2/10. net 30. and if no change in sales volume occurs, then the firm's DSO will probably increase If a firm sells on terms of 2/10. net 30. and its DSO is 30 days, then the firm probably has some pan due accounts. If a firm sells on terms of net 60. and if its sales arc highly) seasonal, with a sharp peak in December, then its DSO as it is typically calculated (with sales per day -Sales for past 12 months'365) would probably be lower in January than in July If a firm changed the credit terms offered to its customers from 210. net 30 to 2/10. net 60. (hen its sales should increase. and this should lead to an increase in sales per day. and that should lead to a decrease in the DSO

Explanation / Answer

Days Sales Outstanding (DSO) = (Account Receivables / Annual Sales) x 365. It is measure of number of days for a company to convert its credit sales into cash.

1. Higher DSO means it takes longer for the company's sales to convert into cash, which is bad for credit cycle.

2. 2/10 net 30 means that if the bill is paid within 10 days, there is 2% discount on sales, otherwise the total amount is paid in 30 days. It is given that sales volume is constant, but we do not know how much the new credit policy will impact the dollar revenues because of the 2% discount and how much will it impact our account receivables, so it's impact is difficult to measure.

3. If a company's DSO is 30 days, then it is very likely that during any point in time during a year, there will be some due accounts. So, it's the right answer.

4. As annual sales are measured in the calculation of DSO, it would include both peak and non-peak months, with no impact on DSO.

5. Changing to net 60 policy might increase sales but would also increase the company's account receivable, so it is difficult to calculate its impact on DSO.

Correct Answer: If a firm sells on terms of 2/10, net 30, and its DSO is 30 days, then the firm probably has some past due accounts.

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