Data on Shick Inc.for last year 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.

Question

Data on Shick Inc.for last year 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.  ​

Quizplus · Accepted Answer

Days sales outstanding (DSO) = (Accounts receivable / Annual credit sales) x 365 days
For Shick Inc., 
DSO = (Accounts receivable / Annual credit sales) x 365
DSO = (55,000 / 1,095,000) x 365
DSO = 18.43 days

Average DSO of benchmarks = (14 + 16 + 20 + 22 + 24) / 5 = 19.2 days

To bring the DSO of Shick Inc. to the benchmark level, the new CFO has to reduce the DSO by 
19.2 days – 18.43 days = 0.77 days

This reduction in DSO can be achieved by reducing accounts receivable.

So, the reduction in accounts receivable = 
(Accounts receivable / Annual credit sales) x 365 x Reduction in DSO
= (55,000 / 1,095,000) x 365 x 0.77
= $9,918

Therefore, the receivables would decline by $9,918 if the new CFO succeeds in reducing DSO to the benchmark level.