Question

Based on the following data for the current year, what is the days' sales in receivables? Assume 365 days a year.

Line item description
Amount
Sales on account during year
584,000
Cost of goods sold during year300,000
Accounts receivable, beginning of year
45,000
Accounts receivable, end of year35,000
Inventory, beginning of year
90,000
Inventory, end of year110,000

Answer 1

To calculate the days' sales in receivables, we find the average accounts receivable to be $40,000 and divide this by the daily sales of $1,600.548 to get approximately 25 days, which is a measure of how quickly the company collects payments.

Step-by-step explanation:

Calculating Days' Sales in Receivables

To calculate the days' sales in receivables, you need to determine the average accounts receivable and divide that by the daily sales. First, we calculate average accounts receivable by adding the beginning and end of year accounts receivable and dividing by two: (45,000 + 35,000) / 2 = 40,000. We then find daily sales by dividing sales on account by 365 days: 584,000 / 365 = 1,600.548. Next, the average days' sales in receivables is calculated by dividing the average accounts receivable by the daily sales: 40,000 / 1,600.548 = 25 days approximately.

This metric is crucial as it indicates the average number of days it takes a company to collect payment after a sale has been made, which is significant for managing cash flow.