Craig Company currently has $1,000,000 in accounts receivable. Its days sales outstanding (DSO) is 50 days. 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? Assume a 365-day year.
A) $576,000
B) $633,333
C) $750,000
D) $900,000
E) $966,667

Question

Quizplus · Accepted Answer

The correct answer is A.The company's current accounts receivable is $1,000,000 and its DSO is 50 days. This means that the company's average sales are $1,000,000 / 50 days = $20,000 per day.If the company reduces its DSO to 32 days, its average sales will fall by 10%, to $20,000 * 0.9 = $18,000 per day.The company's new accounts receivable will be $18,000 * 32 days = $576,000.

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