Question

Receivables Investment McEwan Industries sells on terms of 3/10, net 30. Total sales for the year are $1,921,000; 40% of the customers pay on the 10th day and take discounts, while the other 60% pay, on average, 70 days after their purchases. What is the days sales outstanding? .40 * 10 + .60 * 70 4 + 42 days days sales outstanding = 46 days What is the average amount of receivables? 1,921,000*46/365 $242,098.63 What is the percentage cost of trade credit to customers who take the discount? .03*365 / .97x20 56.44% What is the percentage cost of trade credit to customers who do not take the discount and pay in 70 days? .03*365 / .97x60 18.8% What would happen to McEwan’s accounts receivable if it toughened up on its collection policy with the result that all nondiscount customers paid on the 30th day?

Answer 1

Answer:

Days Sales outstanding is the average number of days that a business take to collect the cash after making sales on account.

Days Sales outstanding = ( 40% x 10 days ) + ( 60% x 70 days ) = ( 0.4 x 10 ) + ( 60% x 70 ) = 46 Days

Receivable per day = 1,921,000/365

Average Receivables = $5,263.01 x 46 = $242,098.63

Trade credit to customer who take discount = (3%x365)/(97%x20) = 56.44%

Trade credit to customer who don't take discount = (3%x365)/(97%x60) = 18.8%

As the percentage of customers who take discount is higher than the customer who don't. If McEwan’s tightened its credit the customers who take discount can reduce the receivables.