Which formula is used to calculate Days' Sales in Receivables?

The formula used to calculate Days' Sales in Receivables is based on the relationship between the company's credit sales and its accounts receivable. Specifically, Days' Sales in Receivables indicates the average number of days it takes for a company to collect cash from its credit sales.

The Receivables Turnover ratio, which is calculated as Credit Sales divided by Average Accounts Receivable, provides insight into how effectively a company is managing its receivables. To convert this turnover ratio into the average collection period—i.e., the number of days it takes to collect on receivables—you take the number of days in a year (365) and divide it by the Receivables Turnover ratio. This transformation gives the formula of 365 divided by the Receivables Turnover.

This formula is critical in finance, as it helps assess how efficiently a company is collecting its receivables. A lower number of days indicates that the company is collecting its receivables quickly, while a higher number might suggest collection issues, potentially affecting cash flow.

In contrast, the other options either represent incorrect formulas or do not accurately reflect the calculation of Days' Sales in Receivables. For instance, the formula involving multiplying accounts receivable by sales or