Solving for Avg A/R Balance

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:

  1. Receivables Turnover: Annual Sales/Avg Receivables

  2. Days Sales Outstanding: 1/Receivables Turnover

The answer just states A/R Turnover to be 365/collection period. Is this another formula to memorize?

I think it’s because…

  1. Receivables Turnover = Annual Sales/ Avg Receivables

  2. 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