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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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zainsubhani

Answer:

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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