Question

If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding will ________?

1) increase
2) decrease
3) remain the same
4) cannot be determined

Answer 1

If a firm increases its sales while holding its accounts receivable constant, its days' sales outstanding will decrease.

Step-by-step explanation:

If a firm increases its sales while holding its accounts receivable constant, then its days' sales outstanding will decrease.

Days' sales outstanding (DSO) is a measure of the average number of days it takes for a company to collect payment from its customers. When a firm increases its sales while keeping its accounts receivable (the amount that customers owe the company) constant, it means that the firm is collecting payments from its customers more quickly. As a result, the DSO will decrease as the firm is able to collect payment faster.

For example, let's say a firm had $100,000 in sales and $10,000 in accounts receivable, resulting in a DSO of 10 days. If the firm increases its sales to $150,000 while keeping the accounts receivable at $10,000, the DSO will decrease because the firm is collecting payment faster relative to its sales volume.