Multiple Choice
What does an average collection period of 30 days indicate for a company?
14. Financial Statement Analysis
Ratios: Average Collection Period (Days Sales Outstanding)
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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?
A
73 days
B
49 days
C
29 days
D
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Verified step by step guidance1
Understand the formula for Days' Sales Outstanding (DSO), which is: \( \text{DSO} = \left( \frac{\text{Accounts Receivable}}{\text{Net Sales}} \right) \times \text{Number of Days in Period} \).
Identify the given values: Accounts Receivable (AR) is $16,000, Net Sales is $200,000, and the typical number of days in a period is 365 days for a year.
Substitute the given values into the DSO formula: \( \text{DSO} = \left( \frac{16,000}{200,000} \right) \times 365 \).
Calculate the fraction \( \frac{16,000}{200,000} \) to determine the proportion of sales that are outstanding as receivables.
Multiply the result of the fraction by 365 to find the Days' Sales Outstanding, which represents the average number of days it takes to collect receivables.
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