Multiple Choice
ABC Company had \$200,000 in Net Sales and Gross Profit of \$80,000. If AR had a balance of \$16,000, what are the days' sales outstanding?
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14. Financial Statement Analysis
Ratios: Average Collection Period (Days Sales Outstanding)
Multiple Choice
Kelso's has an average collection period (Days Sales Outstanding) of 49 days. How should this be interpreted?
A
Kelso's pays its suppliers 49 days after receiving goods.
B
Kelso's generates sales every 49 days.
C
Kelso's takes 49 days to sell its entire inventory.
D
On average, it takes Kelso's 49 days to collect payment from its customers after a sale is made.
Verified step by step guidance1
Understand the concept of the Average Collection Period (Days Sales Outstanding). It measures the average number of days it takes a company to collect payment from its customers after a sale is made. This is a key metric in assessing a company's liquidity and efficiency in managing receivables.
Analyze the given information: Kelso's has an average collection period of 49 days. This means that, on average, it takes Kelso's 49 days to collect payment from its customers after a sale is made.
Evaluate the provided options: The first option refers to the time Kelso's takes to pay its suppliers, which is unrelated to the average collection period. The second option refers to the frequency of generating sales, which is also unrelated. The third option refers to inventory turnover, which is a different metric entirely.
Identify the correct interpretation: The correct interpretation is that Kelso's takes 49 days, on average, to collect payment from its customers after a sale is made. This aligns with the definition of the average collection period.
Conclude by emphasizing the importance of this metric: A shorter average collection period indicates that the company is efficient in collecting receivables, while a longer period may suggest potential issues with credit policies or customer payment behavior.
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