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
Which of the following is the correct formula for calculating the Average Collection Period (Days Sales Outstanding)?
A
Average Collection Period = \(\frac{Accounts\ Receivable}{Average\ Daily\ Credit\ Sales}\)
B
Average Collection Period = \(\frac{Accounts\ Payable}{Average\ Daily\ Purchases}\)
C
Average Collection Period = \(\frac{Net\ Sales}{Accounts\ Receivable}\)
D
Average Collection Period = \(\frac{Total\ Assets}{Net\ Sales}\)
Verified step by step guidance1
Understand the concept of Average Collection Period (Days Sales Outstanding). It measures the average number of days it takes for a company to collect payments from its credit sales. This is a key liquidity metric.
Identify the correct formula for Average Collection Period. The formula is: Average Collection Period = \( \frac{\text{Accounts Receivable}}{\text{Average Daily Credit Sales}} \).
Break down the components of the formula: Accounts Receivable represents the amount owed to the company by customers, and Average Daily Credit Sales is calculated by dividing total credit sales by the number of days in the period (e.g., 365 days for a year).
Compare the given options to the correct formula. The correct formula matches the first option: \( \frac{\text{Accounts Receivable}}{\text{Average Daily Credit Sales}} \).
Conclude that the other options are incorrect because they use unrelated variables such as Accounts Payable, Net Sales, or Total Assets, which do not measure the time it takes to collect receivables.
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