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Accounts Receivable and Days Sales Outstanding

McDowell Industries sells on terms of 3/10, net 30. Total sales for the year are $912,500; 40 % of the customers pay on the 10th day and take discounts, while the other 60% pay on average 40 days after their purchases.

A. What is the days' sales outstanding?
B. What is the average amount of receivables?
C. What is the percentage cost of trade credit to customers who take the discount and to those who do not take it?
D. What would happen to its accounts receivable if McDowell toughened up on its collection policy with the result that all nondiscount customers paid on the 30th day?

Solution Preview

A. What is the days sales outstanding?

The days sales outstanding would be the weighted average of the number of days taken to repay. 40% pay in 10 days and 60% pay in 40 days
DSO = 0.4X10 + 0.6X40 = 28 days

B. What is the average amount of receivables?

Average amount of receivables = Per day sales X ...

Solution Summary

The solution explains the calculation of accounts receivable and days sales outstanding. 213 words total,including displayed calculations.

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