Gizmonic Institute Corp. currently has $715,000 in accounts receivable and gener

Question

Gizmonic Institute Corp. currently has $715,000 in accounts receivable and generated $4,350,000 in sales (all on credit) during the year that just ended. The firm's days sales outstanding (DSO) is days? Use 365 days as the length of a year in all calculations. Gizmonic Institute Corp.'s CFO is unhappy with its DSO and wants to improve collections next year. Sales are expected to grow by 13% next year, and the CFO wants to lower the DSO to the industry average of 30 days. How much accounts receivable is the firm expected to carry? $404,014 $424,215 $525,218 $363,613

Explanation / Answer

a)

In this question,

Accounts receivable = $715,000

Annual revenue = $4,350,000

Number of days in the year = 365

The formula for Days sales outstanding (DSO) = (Accounts receivable ÷ Annual revenue) × Number of days in the year

Days sales outstanding (DSO) = ($715,000÷ $4,350,000) × 365 = 59.99 Days

Rounding the answer, Days sales outstanding (DSO) = 60 Days

b)

Next year Annual revenue = 13% more than current year,

=> Next year Annual revenue = $4,350,000 + ($4,350,000 x 0.13) = $4,915,500

Expected Days sales outstanding (DSO) = 30 Days

So Accounts receivable = (Days sales outstanding x Annual revenue) / Number of days in the year

=> Accounts receivable = (30 x $4,915,500) / 365 = $404013.7

Rounding the Answer, Accounts receivable = $404,014

So the answer is Option A

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