Receivables investment Lamar Lumber Company has sales of $8 million per year, al

Question

Receivables investment

Lamar Lumber Company has sales of $8 million per year, all on credit terms calling for payment within 30 days; and its accounts receivable are $1.6 million. Assume 365 days in year for your calculations.

What is Lamar's DSO? Round your answer to two decimal places.
days

What would DSO be if all customers paid on time? Round your answer to two decimal places.
days

How much capital would be released if Lamar could take actions that led to on-time payments? Round your answer to the nearest cent.
$  

Explanation / Answer

Answer: Lamar’s DSO:

DSO = Receivables/ (Annual sales/365)

= $1600,000/($8,000,000/365) = 73 days

If all customers paid on time, it would be:

DSO = Receivables/ (Annual sales/30) = $1600,000/($8,000,000/30) = 6 days

If Lamar could take action that led to on-time payments, capital would be release:

Accounts Receivable = Sales per day x length of collection period = ($8,000,000/365) x 30 = $657534.25

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