Q8-24RQ - Horngren'S Financial And Managerial Accounting

Question

What do the days’ sales in receivables indicate, and how is it calculated?

Step-by-Step Solution

Answer

Answer

Days’ sales in receivables indicate how many days it takes to collect the average level of accounts receivable. It is calculated by dividing 365 by accounts receivable turnover ratio.

Step 1: Formula for Days’ sales in receivables

The formula of days’ sales in receivables is calculated as follows: 

 $Day\text{'}s sales in recivables=\frac{365}{Accounts receivable turnover ratio}$

Step 2: Significance for Days’ sales in receivables

The shorter the collection period is good sign for the company as company will be able to collect cash early. And these cash proceeds can be used for another activities.