How is days to collect accounts receivable determined?
How is days to collect accounts receivable determined?
A) 365 days divided by accounts receivable turnover.
B) Net sales divided by 365.
C) Net sales divided by average net trade receivables.
D) Accounts receivable turnover divided by 365 days.
Explanation:
Days to collect accounts receivable = 365 days ÷ Accounts receivable turnover Accounts receivable turnover is the measure of how frequently accounts receivable are converted into cash. It is calculated by dividing net credit sales by the average net accounts receivable during the accounting period. It is a ratio that measures the effectiveness of a company's credit and collection policies. Days to collect accounts receivable is a measure of the average number of days it takes a company to collect its accounts receivable. A lower number of days to collect accounts receivable is an indicator that the company is efficient in its collection procedures. A high number of days to collect accounts receivable indicates a weak collection process, which may result in an increase in bad debt expense. The days to collect accounts receivable is an important measure of a company's financial performance because it indicates how efficiently the company is managing its accounts receivable. The faster a company collects its accounts receivable, the more cash it will have on hand to invest in its operations, pay its bills, or distribute to shareholders. Therefore, it is essential for a company to manage its accounts receivable effectively, so it can have sufficient cash to meet its short-term obligations.
Final answer:
Days to collect accounts receivable is determined by dividing 365 by the accounts receivable turnover, which reflects how quickly a company collects payments owed by its customers.