Multiple Choice
Accounts receivable turnover is calculated using which of the following formulas?
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14. Financial Statement Analysis
Ratios: Accounts Receivable (AR) Turnover
Multiple Choice
Which of the following best describes what the days' sales uncollected ratio assesses?
A
It determines the proportion of receivables written off as uncollectible.
B
It calculates the percentage of sales that are made on credit.
C
It measures the average number of days it takes to collect accounts receivable after a sale.
D
It evaluates the efficiency of inventory management over a period.
Verified step by step guidance1
Understand the concept of the days' sales uncollected ratio: This ratio measures the average number of days it takes for a company to collect its accounts receivable after a sale. It is a key indicator of liquidity and efficiency in managing receivables.
Identify the formula for the days' sales uncollected ratio: The formula is \( \text{Days' Sales Uncollected} = \frac{\text{Accounts Receivable}}{\text{Net Sales}} \times \text{Number of Days in the Period} \).
Analyze the options provided in the problem: The correct description should align with the purpose of the ratio, which is to assess the average collection period for receivables.
Eliminate incorrect options: For example, the ratio does not evaluate inventory management, nor does it calculate the percentage of credit sales or the proportion of receivables written off.
Select the correct answer: Based on the analysis, the correct description is 'It measures the average number of days it takes to collect accounts receivable after a sale.'
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