Garcia Industries has sales of $176,500 and accounts receivable of $18,500. Assume all sales to be on credit. The industry average DSO is 27 days, based on a 365-day year. If the company changes its credit and collection policy sufficiently to cause its DSO to fall to the industry average, and if it earns 3.0% on any cash freed-up by this change, assuming other things are held constant, by how much would the net income be affected?

$163.32

Explanation:

Days Sales Outstanding = 365 * Accounts receivable / Sales

If the Days Sales Outstanding falls to the industry average:

27 = 365 * Accounts receivable / $176,500

27 * $176,500 = 365 * Accounts receivable

Accounts receivable = 27 * $176,500 / 365

Accounts receivable = $13,056.16

Increase in net income = Decrease in accounts receivable * 3%

Increase in net income = ($18,500 - $13,056.16) * 3%

Increase in net income = $5,443.84 * 3%

Increase in net income = $163.3152

Increase in net income = $163.32