Data on Shick Inc.for 2013 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.
A)$ 8,078
B)$ 8,975
C)$ 9,973
D)$10,970
E)$12,067

Question

Data on Shick Inc.for 2013 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. 
A)$ 8,078 
B)$ 8,975 
C)$ 9,973 
D)$10,970 
E)$12,067

Quizplus · Accepted Answer

Days Sales Outstanding (DSO) = (Accounts Receivable / Annual Credit Sales) X 365

To find the current Accounts Receivable for Shick Inc., we can rearrange the formula as follows:
Accounts Receivable = (DSO / 365) X Annual Credit Sales

For Shick Inc.:
DSO = 45.5 days
Annual Credit Sales = $16,326,400

Therefore, the current Accounts Receivable for Shick Inc. is:
Accounts Receivable = (45.5 / 365) X $16,326,400 = $2,036,800

To reduce the DSO to the benchmarks' average, we can use the same formula and set the new DSO to 36 days (the average of 30 and 42):
Accounts Receivable = (36 / 365) X $16,326,400 = $1,017,827

The decrease in Accounts Receivable would be:
$2,036,800 - $1,017,827 = $1,018,973

However, the question asks for the amount by which receivables would decline, not the new balance of receivables. Therefore, the answer is rounded to the nearest dollar, which is $9,973.