Which formula correctly computes Accounts Receivable Days?

Which formula correctly computes Accounts Receivable Days?

• A. Accounts Receivable Days = Accounts Receivable / Revenue × 365
• B. Accounts Receivable Days = Accounts Receivable / COGS × 365
• C. Accounts Receivable Days = Revenue / Accounts Receivable × 365
• D. Accounts Receivable Days = (Accounts Receivable + Revenue) / 365

Answer: (A)

This question measures how long, on average, it takes to collect from customers—Days Sales Outstanding. The idea is to compare the amount tied up in accounts receivable with the speed of sales, using the ratio of receivables to credit sales, then scale to a year by multiplying by 365. When you approximate average accounts receivable with the ending balance and annual revenue with net credit sales, the correct expression is Accounts Receivable Days = Accounts Receivable ÷ Revenue × 365. If more money is owed to you relative to how quickly you generate sales, it takes longer to collect, so the days outstanding increases. Using cost of goods sold would not reflect cash collections from sales, since COGS pertains to production costs rather than sales on credit. Reversing the ratio would invert turnover, not measure days to collect. Adding revenue to receivables has no basis in this turnover calculation.

This question measures how long, on average, it takes to collect from customers—Days Sales Outstanding. The idea is to compare the amount tied up in accounts receivable with the speed of sales, using the ratio of receivables to credit sales, then scale to a year by multiplying by 365. When you approximate average accounts receivable with the ending balance and annual revenue with net credit sales, the correct expression is Accounts Receivable Days = Accounts Receivable ÷ Revenue × 365. If more money is owed to you relative to how quickly you generate sales, it takes longer to collect, so the days outstanding increases.

Using cost of goods sold would not reflect cash collections from sales, since COGS pertains to production costs rather than sales on credit. Reversing the ratio would invert turnover, not measure days to collect. Adding revenue to receivables has no basis in this turnover calculation.