CFA Practice Question

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CFA Practice Question

Which of the following is the formula for computing the average collection period for accounts receivable?

A. Gross accounts receivable divided by average daily credit sales
B. Net accounts receivable divided by average daily credit sales
C. Total credit sales divided by 365 days
Correct Answer: B

The formula for computing the average collection period is net accounts receivable divided by average daily credit sales. Net accounts receivable are accounts receivable minus the allowance for doubtful accounts. If credit sales are not available, the analyst may use average daily total sales as a surrogate.

User Contributed Comments 8

User Comment
kalps Average collection period = net accounts receivable / average daily credit sales
mm04 Collectin Period = 365 * Avg. Rev./Net Sales ->
Avg. Coll. Period = Avg. Rev/Net Sales
synner avg col period = avg. rev/(netsales/365)
= 365*avg. rev/netsales
netsales/365 = daily net sales
mtcfa Can you also say this is 365/receibvables turnover, where turnover = sales/avg. rec.
Shelton Avg_Rcv_Ds = 365 * Avg_Rcv / Net_A_Sales
Avg_Col_Rcv = 365 * Net_AR / Net_A_Sales

Diff bt Avg_Rcv & Net_AR?
rocyang average daily credit sales = average daily a/r
thus,
net a/r / average daily a/c = # of days of an average collection period
johntan1979 Not another vague question :(

Revenue or net credit sales is not the same as average daily sales. They can't be switch freely. And how did average a/r become net receivables just like that? Big difference there.

Let's just focus on the default formulas:

Receivables turnover = Revenue / Avg Receivables

DSO or DAR = 365 / Receivables turnover
johntan1979 Another big issue is which net a/r do you use? The one at the beginning of the year or the one at the end? Best to avoid something ambiguous like this.
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