4. Accounts receivable AaAa Effective credit management involves establishing cr

Question

4. Accounts receivable AaAa Effective credit management involves establishing credit standards for extending credit to customers, determining the company's terms of credit, and setting up procedures for invoicing and collecting past-due accounts. The following statement refers to a credit management policy. Select the best term to complete the sentence. The minimum financial strength a customer must have to be granted credit is indicated by the company's Consider the case of Osato Chemicals Inc. Osato Chemicals Inc.'s CFO has decided to take a closer look at the company's credit policy. Osato Chemicals Inc. has annual sales of $379.3 million, and it currenty has an accounts receivable balance of $46.3 million. The first step in analyzing the firm's credit policy is to determine its days sales outstanding (DSO). Based on this information, Osato Chemicals Inc.'s DSO is year in all calculations.) (Note: Use 365 days as the length of a The average DsO for Osato Chemicals Inc.'s industry is 51.2 days. Assuming that its sales stayed the same, what would be Osato Chemicals Inc.'s receivables balance if it maintained the industry average Dso? Osato Chemicals Inc.'s CFO thinks that the company has not done a very good job of enforcing its credit policy. The CFO believes that if the company were to better enforce its credit policy, it would reduce its Dso to 30 days; MacBook Pro

Explanation / Answer

DSO = Account receivable/Total credit sales * no of days

Osato chemicals Inc has annual sales of $379.3 million and account receviable = 46.3 million

Thus DSO = 46.3/379.3 * 365

=44.55 days

Industry's DSO = 51.2 days if it has to maintain that receivable would be

55.2 = Receivables/379.3 * 365

Receivables = 55.2/365 * 379.3

=$57.36 million

Now, if DSO will be reduced to 30 days new sales would be = 379.3 - 5% =360.335

DSO = Account receivables/Sales * 365

=30 = Account receivables/360.335 *365

Account receivables = $29.61670 million

Thus answer = $2961670

Related Questions

Navigate

• Browse (All)
• Browse 4
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.