Data on Shick Inc. for 2012 are shown below, along with the days sales outstanding of the firms against which it benchmarks. The firm's new CFO believes that the company could reduce its receivables enough to reduce its DSO to the benchmarks' average. If this were done, by how much would receivables decline? Use a 365-day year. Sales $110,000 Accounts receivable $16,000 Days sales outstanding (DSO)Benchmarks' days sales outstanding (DSO) 20.00

Question

Quizplus · Accepted Answer

First, we need to calculate the current DSO for Shick Inc.:

DSO = (Accounts receivable ÷ Sales) x 365
DSO = (16,000 ÷ 110,000) x 365
DSO = 53

Next, we need to calculate the difference between Shick's DSO and the benchmark DSO:

DSO difference = Benchmark DSO - Shick DSO
DSO difference = 20 - 53
DSO difference = -33

A negative DSO difference means that Shick's DSO is higher than the benchmark DSO. To reduce their DSO to the benchmark average, Shick would need to reduce their current DSO by 33 days.

To calculate the required reduction in receivables, we can use the following formula:

Receivables reduction = (DSO difference ÷ 365) x Sales

Receivables reduction = (-33 ÷ 365) x 110,000
Receivables reduction = -$9,973

Since we want to know the amount by which receivables would decline, we drop the negative sign and choose answer choice C, $9,973.