Exam (elaborations) Working Capital Management

FINANCIAL MANAGEMENT
SATURDAY, 9:00 AM to 7:30 PM
Assignment on Working Capital Management:

A. Concorde Inc. has sales of $10 million per year, all on credit terms calling for payment within 30 days. It’s
accounts receivable are $2 million.

SOLUTION:
GIVEN: Sales = $ 10M
Terms= 30 days
Accounts Receivable= $ 2M

Required:
1. What is Concorde’s days sales outstanding? 73 days
𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛 𝑃𝑒𝑟𝑖𝑜𝑑 (𝐴𝐶𝑃 𝑜𝑟 𝐷𝑆𝑂) =
𝑆𝑎𝑙𝑒𝑠
365
$ 2,000,000
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛 𝑃𝑒𝑟𝑖𝑜𝑑 (𝐴𝐶𝑃 𝑜𝑟 𝐷𝑆𝑂) =
$ 10,000,000
365
2,000,000
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛 𝑃𝑒𝑟𝑖𝑜𝑑 (𝐴𝐶𝑃 𝑜𝑟 𝐷𝑆𝑂) =
27,397.2602
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛 𝑃𝑒𝑟𝑖𝑜𝑑 (𝐴𝐶𝑃 𝑜𝑟 𝐷𝑆𝑂) = 73.0000001971

𝑨𝒏𝒔𝒘𝒆𝒓: 𝟕𝟑 𝒅𝒂𝒚𝒔



2. What would it be if all customers paid on time? 30 days

If all customers paid on time, then the firm’s DSO = 30 days.

******* If customers paid on time, the accounts receivable would be:

𝐴𝐶𝐶𝑂𝑈𝑁𝑇𝑆 𝑅𝐸𝐶𝐸𝐼𝑉𝐴𝐵𝐿𝐸𝑆 = 𝑆𝑎𝑙𝑒𝑠 𝑝𝑒𝑟 𝑑𝑎𝑦 𝑥 𝐿𝑒𝑛𝑔𝑡ℎ 𝑜𝑓 𝐶𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛 𝑝𝑒𝑟𝑖𝑜𝑑
𝑆𝑎𝑙𝑒𝑠
𝐴𝐶𝐶𝑂𝑈𝑁𝑇𝑆 𝑅𝐸𝐶𝐸𝐼𝑉𝐴𝐵𝐿𝐸𝑆 = 𝑥 𝐿𝑒𝑛𝑔𝑡ℎ 𝑜𝑓 𝐶𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛 𝑝𝑒𝑟𝑖𝑜𝑑
365
$ 10,000,000
𝐴𝐶𝐶𝑂𝑈𝑁𝑇𝑆 𝑅𝐸𝐶𝐸𝐼𝑉𝐴𝐵𝐿𝐸𝑆 = ( ) 𝑥 30
365
𝐴𝐶𝐶𝑂𝑈𝑁𝑇𝑆 𝑅𝐸𝐶𝐸𝐼𝑉𝐴𝐵𝐿𝐸𝑆 = $ 821,917.8082

𝑇ℎ𝑒 𝑓𝑖𝑟𝑚′ 𝑠 𝐴𝑐𝑐𝑜𝑢𝑛𝑡 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑖𝑠 $𝟖𝟐𝟏, 𝟗𝟏𝟕. 𝟖𝟏