Finance Word Problem

Question

A company has net income of $198,000, a profit margin of 9.50 percent, and an accounts receivable balance of $106,697. Assuming 67 percent of sales are on credit, what is the company's days' sales in receivables

Answer 1

Net Profit Margin = Net Income/ Sales

 

Since the profit margin is 9.5% then to obtain Sales: 198,000/9.5%

 

That gives us 2,084,210.53 as the sales figure

 

67% of Sales are Credit Sales

 

Therefore, the credit sales are : 2,084,210.53 * .67 = $1,396,421.05 

 

Next, we need to obtain the accounts receivable turnover ratio. This is normally used with by finding the average accounts receivable balance but the question does not provide this. 

 

As a result, we will just use the accounts receivable balance of $106,697. 

 

A/C Receivable turnover ratio gives us the number of times during a period that a business collects on its receivables. It is computed with the formula: Credit Sales/ Average Accounts Receivable

 

1,396,421/ 106,697= 13.08 times

 

Then to calculate Days Sales in Receivables

 

365/13.08 = 27 days 

 

This means that receivables take approximately 27 days before they are converted into cash.