8. Accounts receivable Aa Aa Effective credit management involves establishing c

Question

8. Accounts receivable Aa Aa Effective credit management involves establishing credit standards for extending credit to customers, determining the company's terms of credit, and setting up procedures for invoicing and collecting past-due accounts. The following statement refers to a credit management policy. Select the best term to complete the sentence. How a company handles its credit accounts, including methods of invoicing and collecting past-due accounts, is indicated by the company's Consider the case of Osato Chemicals Inc. Osato Chemicals Inc.'s CFO has decided to take a closer look at the company's credit policy. Osato Chemicals Inc. has annual sales of $379.3 million, and it currently has an accounts receivable balance of $47.6 million. The first step in analyzing the firm's credit policy is to determine its days sales outstanding (DSO) Based on this information, Osato Chemicals Inc.'s DSO is year in all calculations.) (Note: Use 365 days as the length of a The average DSO for Osato Chemicals Inc.'s industry is 51.7 days. Assuming that its sales stayed the same, what would be Osato Chemicals Inc.'s receivables balance if it maintained the industry average DSO? Osato Chemicals Inc.'s CFO thinks that the company has not done a very good job of enforcing its credit policy. The CFO believes that if the company were to better enforce its credit policy, it would reduce its DSO to 30 days however, this will cause Osato Chemicals Inc. to lose 4% of its sales revenue, what would Osato Chemicals Inc.'s expected accounts receivables balance be if it decides to tighten its credit policy? O $25,439,081 O $29,928,330 O $26,935,497 O $32,921,163

Explanation / Answer

1) How a company handles its credit accounts, including methods of invoicing and collecting past-due accounts, is indicated by the company's collection policy.

2) DSO = (Average Receivables / Total Sales) x 365 days = ($47.6 million / $379.3 million) x 365 days = 46.54 or 46.6 or 47 days

3) DSO = (Average Receivables / Total Sales) x 365 days

or, 51.7 = (Average Receivables / $379.3 million) x 365

or, Average Receivables = $53.73 million or $52.7 million

4) New DSO = 30 days

New Sales = $379.3 million - 4% = $364.128 million or $364,128,000

DSO = (Average receivables / $364,128,000) x 365

or, Average receivables = 30 x $364,128,000/ 365 = $29,928,329 or $29928330 (option 2)

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