Brown Corporation had an average receivable collection period of 19days in 2003. Brown wants to decrease its collection period in 2004 to match the industry average of 15days. Credit sales in 2003 were $300 million and Brown expects credit sales to increase to $350 million in 2004. To achieve Brown’s goal of decreasing the collection period, the change in the average accounts receivable balance from 2003 to 2004 that must occur is closest to: A. -$2.46million B. -$1.22million C. $1.22million D. $2.46million
I believe the answer is B. In 2003, the average accounts receivable balance was 300 million/(365/19) = $15.61 million. In 2004, the average accounts receivable balance will need to be 350/(365/15) = $14.38 million. Thus, the average balance must be reduced by approximately 1.22 million. To check, we can confirm that with an average balance of $14.38 million, we collect the receivables balance 24.33 times per year ($350/$14.38) which means one collection cycle every 15 days (365/24.33).
yeah, the ans is b
i got b. goes something like this, but i rounded to do this quick. avg receivables in 03 = 15.8m avg receivables in 04 = 14.6m avg coll per in 03: 365 / ar to = 19 days. (a/r to = 19) 300m sales / avg rec = 19 (avg rec = 15.8m) avg coll per in 04: 365 / ar to = 15 days (a/r turnover = 24) 350m sales / avg rec = 24 (avg rec = 14.6m)