Diazstar corporation sells on terms of 2/10, n/30. 70% of costumers normally avail of the discounts. annual sales are $900,000. 80% of which is made on credit. Cost is approximately 75% of sales.
required:
1. average balance in accounts receivable.
2. average investment in accounts receivable.
To calculate the average balance in accounts receivable, you need to consider the sales made on credit, the percentage of customers availing the discounts, and the payment period.
1. Average Balance in Accounts Receivable:
Step 1: Calculate the credit sales amount:
Credit Sales = Annual Sales * Percentage of Sales Made on Credit
Credit Sales = $900,000 * 0.80 = $720,000
Step 2: Calculate the portion that does not avail the discount:
Sales without Discount = Credit Sales * (1 - Percentage of Customers Availing Discount)
Sales without Discount = $720,000 * (1 - 0.70) = $216,000
Step 3: Calculate the portion that avails the discount within the discount period:
Sales within Discount Period = Sales without Discount * Percentage of Discount Availed
Sales within Discount Period = $216,000 * 0.02 = $4,320
Step 4: Calculate the portion that avails the discount after the discount period:
Sales after Discount Period = Sales without Discount - Sales within Discount Period
Sales after Discount Period = $216,000 - $4,320 = $211,680
Step 5: Calculate the average balance in accounts receivable:
Average Balance = (Sales within Discount Period * Discount Days) + (Sales after Discount Period * Payment Days)
Average Balance = ($4,320 * 10) + ($211,680 * 30)
The average balance in accounts receivable can then be calculated using the above formula.
2. Average Investment in Accounts Receivable:
To calculate the average investment in accounts receivable, you need to consider the average balance in accounts receivable and the cost of sales as a percentage of sales.
Average Investment = Average Balance in Accounts Receivable * (1 - Cost of Sales as a Percentage of Sales)
The average investment in accounts receivable can then be calculated using the above formula.
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