Brown corporation had average days of sales outstanding of 19 days in the most recent fiscal year.Brown wants to improve it’s credit policies and collection practices and decrease its collection period in the next fiscal yr to match the industry average of 15 days.Credit sales in the most recent fiscal yr were $300m,and brown expects credit sales to increase to $390 m in the next fiscal yr.To achieve brown’s goal of decreasing the collection period,the change in the average accounts receivable balance that must occur is
The answer is option A i.e. +0.41 Hint: Calculate the avg receivables when DOS = 19 days. Let this be d1.
Then calc the avg recv when DOS=15 days. Let this be d2. See for yourself whether d1>d2 or vice versa. That will give you the sense of +/- And magnitude is the diffr between the two
Dear there is nothing as ‘Days’ sales in accoutns payable’ , can it be possible that you sell something and instead of asking for receivable in return, you record that as a payable ?
There is average Days Sales Outstanding (DSO), and there is average Days of Payables (no abbreviation). They’re unrelated, though they both contribute to the cash conversion cycle.
page 303 scheweser Reading #34 - Accounting Shenanigans on the Cash Flow Statement
One way to determine whether a firm is stretching its payables is to examine the number of days in accounts payable. Days’ sales in payables is calculated by dividing accounts payable by COGS and multiplying the result by the number of days in the period. days’ sales in accounts payable = account payable/COGS x number of days
great observation there mokpokpo and sorry I forgot the term for a second. Dear (days’ sales in accounts payable) is useful when you want to consider the payables of the inventory that has been sold, it is one way of testing avg no. of days suppliers are paid whereas Days Payables Outstanding considers total purchases you have made irrespective that those purchased inventories are sold or not.
For purposes of calculating CCC please use ‘Days Payables Outstanding’ and when you want to answer about days it require to pay suppliers use the other ratio.