Ruth Company currently has $1,000,000 in accounts receivable. Its days sales outstanding (DSO) is 50 days (based on a 365-day year). Assume a 365-day year. The company wants to reduce its DSO to the industry average of 32 days by pressuring more of its customers to pay their bills on time. The company's CFO estimates that if this policy is adopted the company's average sales will fall by 10 percent. Assuming that the company adopts this change and succeeds in reducing its DSO to 32 days and does lose 10 percent of its sales, what will be the level of accounts receivable following the change?
A) $576,000
B) $676,667
C) $776,000
D) $900,000
E) $976,667

Question

Quizplus · Accepted Answer

The correct answer is A.The company's current DSO is 50 days, which means that it takes an average of 50 days for the company to collect its accounts receivable. If the company reduces its DSO to 32 days, it will collect its accounts receivable more quickly, which will reduce the level of accounts receivable.The company's average sales will fall by 10 percent if it adopts this policy, which means that the company will have less revenue to collect. This will also reduce the level of accounts receivable.The level of accounts receivable following the change can be calculated as follows:Accounts receivable = Average sales / DSOAverage sales = $1,000,000 / 365 days * 32 days = $876,667Accounts receivable = $876,667 / 32 days = $576,000

Ruth Company Currently Has $1,000,000 in Accounts Receivable