Question

Abc co. reported the following selected financial information for 2021 and 2022:

2022 2021
cash $22,000 $14,000
accounts receivable 42,000 16,000
inventories 22,000 83,000
prepaid expenses 23,000 18,000
total current assets $109,000 $131,000
total current liabilities $65,000 $72,000
net credit sales 221,000 326,000
cost of goods sold 168,000 299,000
assuming a 365 days year, what is the days' sales in receivables or days' sales outstanding (i.e., average collection period in days) for 2022?

Answer 1

The Days' Sales Outstanding (DSO) for ABC Co. in 2022 is approximately 48 days. It is calculated using the average accounts receivable and net credit sales for the year.

Step-by-step explanation:

To calculate the Days' Sales in Receivables or Days' Sales Outstanding (DSO) for 2022, we will use the following formula:

DSO = (Average Accounts Receivable / Net Credit Sales) × Number of Days in the Year

To determine the average accounts receivable, we add the beginning and ending balances for the year and divide by 2. For 2022, this is:

Average Accounts Receivable = (Accounts Receivable at the beginning of 2022 + Accounts Receivable at the end of 2022) / 2
Average Accounts Receivable = ($16,000 + $42,000) / 2 = $29,000

The net credit sales for 2022 are given as $221,000, and we are assuming a year of 365 days. Plugging these numbers into the formula gives us:

DSO for 2022 = ($29,000 / $221,000) × 365 = 47.96 days

This means on average, ABC Co. took approximately 48 days to collect its receivables in 2022.