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External Funding for Cannon Company

Cannon Company has enjoyed a rapid increase in sales in recent years following a decision to sell on credit. However, the firm has noticed a recent increase in its collection period. Last year, total sales were $1 million and $250,000 of those sales was on credit. During the year, the account receivable averaged $41,096. It is expected that sales will increase in the forthcoming year by 50 percent and while credit sales would countinue to be the same proportion of total sales, it is expected that the days sales outstanding will also increase by 50 percent (assume a 365 day year). If the resulting increase in accounts receivable must be financed by external funds, how much external funding will Cannon need?

a. $41,664
b. $51,370
c. $47,359
d. $106,471
e. $93,750

Solution Preview

Answer: b. $51,370

Last year
Sales= $1,000,000
Out of which cerdit sales= $250,000
Therefore % of credit sales= 25% =$250,000/$1,000,000

Accounts receivables= $41,096
Days Sales outstanding (DSO)= 60 =($41,096/$250,000)*365
DSO = (Accouts Receivable/ ...

Solution Summary

This solution calculates the external funding if increase in accounts receivable must be financed by external funds. It is also formatted in an attached Excel file.

$2.19