Multiple Choice
Which of the following best describes what the days' sales uncollected ratio assesses?
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14. Financial Statement Analysis
Ratios: Accounts Receivable (AR) Turnover
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Which of the following represents the receivables turnover ratio?
A
\( \text{Net Credit Sales} \div \text{Total Assets} \)
B
\( \text{Net Income} \div \text{Average Accounts Receivable} \)
C
\( \text{Average Accounts Receivable} \div \text{Net Credit Sales} \)
D
\( \text{Net Credit Sales} \div \text{Average Accounts Receivable} \)
Verified step by step guidance1
Understand the concept of the receivables turnover ratio: It measures how efficiently a company collects revenue from its credit sales. The formula is typically expressed as Net Credit Sales divided by Average Accounts Receivable.
Analyze the options provided in the problem. The goal is to identify the formula that matches the definition of the receivables turnover ratio.
Option 1: Net Credit Sales divided by Total Assets. This formula does not relate to receivables turnover; it might be used for other financial ratios like asset turnover.
Option 2: Net Income divided by Average Accounts Receivable. This formula is incorrect for receivables turnover, as it uses net income instead of net credit sales.
Option 4: Net Credit Sales divided by Average Accounts Receivable. This is the correct formula for the receivables turnover ratio, as it aligns with the definition provided in step 1.
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