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12 July, 08:40

Aziz Industries has sales of $100,000 and accounts receivable of $11,500, and it gives its customers 30 days to pay. The industry average DSO is 27 days, based on a 365-day year. If the company changes its credit and collection policy sufficiently to cause its DSO to fall to the industry average, and if it earns 8.0% on any cash freed-up by this change, how would that affect its net income, assuming other things are held constant?

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  1. 12 July, 09:00
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    Effect on net income=$328.22

    Explanation:

    DSO Formula is:

    DSO = (Account Receivable/Credit sales) x365

    Current DSO is:

    DSO = (11500/100000) x365

    DSO=41.975 days

    In order to calculate the amount lowered we replace Account Receivable in DSO formula by X. DSO is 27 days

    27 = (X/100000) x365

    X=$7397.26

    Now:

    Decrease in Account Receivable = $11500 - $7397.26=$4102.74

    Effect on net income=$4102.74 * 8%

    Effect on net income=$328.22
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