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Ratios: Average Collection Period (Days Sales Outstanding) quiz #1 Flashcards

Ratios: Average Collection Period (Days Sales Outstanding) quiz #1
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  • What is the average collection period (days sales outstanding), and what does it measure in financial accounting?
    The average collection period, also known as days sales outstanding, measures the average number of days it takes for a company to collect cash from its credit sales, indicating how long a dollar remains in accounts receivable before being collected from customers.
  • How do you calculate the average collection period for a company?
    To calculate the average collection period, first find the accounts receivable turnover ratio (Net Credit Sales ÷ Average Accounts Receivable), then divide 365 by the turnover ratio to get the result in days.
  • How is the average accounts receivable balance determined when calculating the accounts receivable turnover ratio?
    The average accounts receivable balance is calculated by adding the beginning and ending accounts receivable balances and dividing by 2.
  • Why is a lower average collection period generally considered better for a company?
    A lower average collection period means the company collects cash from customers more quickly, improving cash flow and efficiency, and reducing the time money is tied up in accounts receivable.
  • If a company has net sales of $500,000, a beginning accounts receivable balance of $75,000, and an ending balance of $25,000, what is its average collection period?
    First, calculate average accounts receivable: ($75,000 + $25,000) ÷ 2 = $50,000. Then, accounts receivable turnover: $500,000 ÷ $50,000 = 10. Finally, average collection period: 365 ÷ 10 = 37 days.
  • What does the average collection period (days sales outstanding) measure in financial accounting?
    It measures the average number of days it takes for a company to collect cash from its credit sales, showing how long a dollar remains in accounts receivable before being collected.
  • What are the two main steps to calculate the average collection period for a company?
    First, calculate the accounts receivable turnover ratio (Net Credit Sales ÷ Average Accounts Receivable), then divide 365 by the turnover ratio to get the average collection period in days.
  • How do you determine the average accounts receivable balance when calculating the accounts receivable turnover ratio?
    Add the beginning and ending accounts receivable balances and divide by 2 to get the average accounts receivable.
  • Why is a lower average collection period generally considered better for a company?
    A lower average collection period means the company collects cash from customers more quickly, improving cash flow and efficiency.
  • If a company has net sales of $500,000, a beginning accounts receivable balance of $75,000, and an ending balance of $25,000, what is its average collection period?
    First, calculate average accounts receivable: ($75,000 + $25,000) ÷ 2 = $50,000; then accounts receivable turnover: $500,000 ÷ $50,000 = 10; finally, average collection period: 365 ÷ 10 = 37 days.