Snider Industries sells on terms of 3/10, net 30. Total sales for the year are $

Question

Snider Industries sells on terms of 3/10, net 30. Total sales for the year are $1,619,000. Thirty percent of the customers pay on the 10th day and take discounts; the other 70% pay, on average, 70 days after their purchases. Assume 365 days in year for your calculations.

What is the days sales outstanding? Round your answer to one decimal place.
days

What is the average amount of receivables? Round your answer to the nearest dollar.
$  

What would happen to average receivables if Snider toughened up on its collection policy with the result that all nondiscount customers paid on the 30th day? Round your answer to the nearest dollar.
$  

Explanation / Answer

Solution - In credit Terms " 3/10, net 30 " implies that the Credit period given to buyers to pay the invoice is 30 days and a discount of 3% can be availed by the buyers if they pay within in 10 days instead of 30 days -

What is the average amount of receivables -

Yearly Sales - $1619000

Yearly Paid in 10 days = 30% of $1619000 = $485700

Yearly Paid in 70 days = 70% of $1619000 = $1133300

Average receivables will be outstading of 10 days(3/10) & outstading of 70 days ( Net 30)

outstading of 10 days(3/10) + outstading of 70 days ( Net 30)

485700/365 x 10 + 1133300/365 x 70

13306.85 + 217345.2

230652.10

Average amount of receivables $230652.10

Now we can find the DSO using Sales & Average AR

DSO = [Accounts receivable / Annual Sales ] x 365

DSO = [230652.10 / 1619000 ] x 365

DSO = 0.1424 x 365

DSO = 51.99

Days sales outstanding ( DSO ) = 52 Days

Now if f Snider toughened up on its collection policy with the result that all nondiscount customers paid on the 30th day then we will have average AR as below

Average receivables will be outstanding of 30 days

[Annual Sales / 365] x 30

[1619000 /365] x 30

4435.616 x 30

133068.5

Thus Average amount of receivables would decrease to $133068.5 with All payment in 30 days

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