Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

14. Financial Statement Analysis

Ratios: Average Collection Period (Days Sales Outstanding)

Financial Accounting

14. Financial Statement Analysis

Ratios: Average Collection Period (Days Sales Outstanding)

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Multiple Choice

Which of the following is the correct formula for calculating the Average Collection Period (Days Sales Outstanding)?

Average Collection Period = \frac{Accounts\ Receivable}{Average\ Daily\ Credit\ Sales}

Average Collection Period = \frac{Accounts\ Payable}{Average\ Daily\ Purchases}

Average Collection Period = \frac{Net\ Sales}{Accounts\ Receivable}

Average Collection Period = \frac{Total\ Assets}{Net\ Sales}

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Verified step by step guidance

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.