Heaton Corp. sells on terms that allow customers 45 days to pay for merchandise.

Question

Heaton Corp. sells on terms that allow customers 45 days to pay for merchandise. Its sales last year were $455,000, and its year-end receivables were $60,000. If its DSO is less than the 45-day credit period, then customers are paying on time. Otherwise, they are paying late. By how much are customers paying early or late? Base your answer on this equation: DSO - Credit period = days early or late, and use a 365-day year when calculating the DSO. A positive answer indicates late payments, while a negative answer indicates early payments.

Explanation / Answer

DSO = Receivables / Turnover X 365 days (assuming a year of 365 days)

Hence, DSO for Heaton Corp = $ 60,000 / $ 455,000 X 365 = 48 days

DSO here is more than the 45 day credit period allowed, and hence the customers are paying late by 3 days.

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