FM27 21 - 1 Looking at the DSO, it appears that customers...

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e. What is the firm's forecasted average daily sales for the first 3 months? For the entire half-year? The days sales outstanding is commonly used to measure receivables performance. What DSO is expected at the end of March? At the end of June? What does the DSO indicate about customers' payments? Is DSO a good management tool in this situation? If not, why not? Answer: For the first quarter, sales totaled $100 + $200 + $300 = $600, so ads = $600/91 = $6.59. Although the sales pattern is different, ads for the second quarter, and hence for the full half-year, is also $6.59. Note that we can rearrange the formula for receivables as follows: A/R = (DSO)(ADS) DSO = ADS A/R . March: DSO = 59 . 6 $ 250 $ = 37.9 days; June: DSO = 59 . 6 $ 110 $ = 16.7 days. Thus, at the end of March, DSO = 37.9 days, while at the end of June, DSO = 16.7 days.
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Unformatted text preview: 1 Looking at the DSO, it appears that customers are paying significantly faster in the second quarter than in the first. However, the receivables balances were created assuming a constant payment pattern, so the DSO is giving a false measure of customers' payment performance . The underlying cause of the problem with the DSO is the seasonal variability in sales. If there were no seasonal pattern, and hence sales were a constant $200 each month, then the DSO would be 27 days in both March and June, indicating that customers' payment patterns had remained steady. 1 Even if one confined ads to the months which contributed to receivables, Feb/Mar and May/Jun, first quarter ADS = $8.33 and DSO = 30 days, while half-year ads = $5.00 and DSO = 22 days, differences would still appear. Mini Case: 27 - 21...
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