Znieh15
November 6, 2013, 2:07am
#1
Business has avg receivables colleciton period of 19 days in 2003. They want to decrease it 15 days in 2004. Credit sales in 2003 are $300m and estimated to be $400m in 2004. What will be the change in the avg receivable balance from 2003 to 2004?
Bit confused:
Been studying two formulas:
Receivables Turnover: Annual Sales/Avg Receivables
Days Sales Outstanding: 1/Receivables Turnover
The answer just states A/R Turnover to be 365/collection period. Is this another formula to memorize?
Psalm_1
November 10, 2013, 11:06am
#2
I think it’s because…
Receivables Turnover = Annual Sales/ Avg Receivables
Days Sales Outstanding (a.k.a collection period) = 365/Receivables turnover. I don’t think it’s 1/receivables turnover as you said.
So if you substitute equation (2) into the answer’s formula, what it’s saying is:
Receivables Turnover
= 365/[365/Receivables turnover]
= 365/1 * 1/[365/Receivables turnover]
= 365/1 * Receivables turnover/365
= Receivables turnover/1, because the 365’s cancel out.
It’s the long way of saying Receivables turnover = Receivables turnover. So, I don’t think it’s another formula to memorise.
Hope that was right :S