Formula for trade receivable days?

Formula for trade receivable days?

• A. (average receivable days / credit purchases) x 365
• B. (average receivable days / credit sales) x 365
• C. (credit sales / average receivable days) x 365
• D. (average receivable days / average credit purchases) x 365

Answer: (B)

This item is about how long it takes, on average, to collect money from customers—the days sales outstanding. The correct way to measure this is to relate average trade receivables to the net credit sales and convert that ratio into days. So the formula is: average trade receivables divided by net credit sales, multiplied by 365. Using the average receivables (often the average of opening and closing balances) smooths out fluctuations, and net credit sales (excluding cash sales) ensure you’re measuring on-credit collections. The result tells you, on average, how many days’ worth of credit sales are tied up in receivables. A higher number means slower collection. For example, if average receivables are 180,000 and net credit sales are 1,200,000 for the year, the days would be (180,000 / 1,200,000) × 365 ≈ 55 days. The other formulations don’t fit because using purchases instead of sales tracks payables, not receivables; using the ratio in the reverse direction would give a value in the wrong units (and not days); and including days in the numerator wouldn’t produce a proper aging measure.

This item is about how long it takes, on average, to collect money from customers—the days sales outstanding. The correct way to measure this is to relate average trade receivables to the net credit sales and convert that ratio into days.

So the formula is: average trade receivables divided by net credit sales, multiplied by 365. Using the average receivables (often the average of opening and closing balances) smooths out fluctuations, and net credit sales (excluding cash sales) ensure you’re measuring on-credit collections. The result tells you, on average, how many days’ worth of credit sales are tied up in receivables. A higher number means slower collection.

For example, if average receivables are 180,000 and net credit sales are 1,200,000 for the year, the days would be (180,000 / 1,200,000) × 365 ≈ 55 days.

The other formulations don’t fit because using purchases instead of sales tracks payables, not receivables; using the ratio in the reverse direction would give a value in the wrong units (and not days); and including days in the numerator wouldn’t produce a proper aging measure.