Question

This year CVS reported sales of $770 million and accounts receivable of $42 million. To dramatically increase its sales next year the company will loosen its credit standards and therefore expects that the ratio of accounts receivable as a percentage of sales will double this year. With sales expected to grow by 4% next year, what would be the projected accounts receivable (in \$ millions, rounded to one decimal place, e.g., \$12.3) for next year?

Answer 1

CVS's projected accounts receivable for next year, after doubling its current ratio of accounts receivable to sales and accounting for a 4% growth in sales, is approximately $87.3 million.

Step-by-step explanation:

If CVS reported sales of $770 million and accounts receivable of $42 million this year, and it expects the ratio of accounts receivable as a percentage of sales to double next year with a 4% growth in sales, we start by calculating the current ratio which is $42 million / $770 million = 0.0545 or 5.45%. With the new credit policy, this ratio will double to 10.9%. Next year's sales are projected to grow by 4%, so $770 million x 1.04 = $800.8 million. The projected accounts receivable for next year would then be 10.9% of $800.8 million which is approximately $87.3 million (rounded to one decimal place).