CFA Practice Question

There are 534 practice questions for this study session.

CFA Practice Question

Which of the following could lead to a rise in receivables days as calculated from the financial statements?
A. Increase in the selling price of the firm's product
B. Unexpected large one-time credit sales at the end of the financial year
C. Introduction of discounts on early payment
Explanation: Both of the other answers reduce receivables days. A key assumption of the receivables days calculation is that sales occur at a fairly constant level. If, however, there is any form of sales build-up towards the end of the financial year, then the receivables days can be misleading. A large sale near the end of the year would increase sales and also the ending balance in Accounts Receivable.

User Contributed Comments 8

User Comment
danlan If sales rises, the receivable turnover=sales/account receivable increases also, so the receivable days decreases, B is wrong.
Shelton Would anybody help to explain C?
fahad B is right if we assume that the the receipt for large one time sale is outstanding at the end of thea year.
desertfox27 taka a look with the computation of receivable turnover = Net Sales / Average Receivables and then the receivable days = 365 / receivable turnover. we will find out which in the 4 options could give us a smaller receivable turn over.

for a. increase in selling price, thus increase in net sales, thus increase in numerator, thus increase in receivable turnover.

for c. encourage prompt payments (to avail the discount), thus decrease the average receivable, thus decrease the denominator, thus increase the receivable turnover.
Tomcat82 A) can also be the answer. When the selling price increases, so does the numerator of the rec. turnover ratio (net sales). However, what they're assuming here is that as the price goes up the sales figure goes up (obviously). However, you can't assume that receivables will remain unchanged. At best it will rise proportionally with sales, keeping the receivable turnover ratio the same. However, I would think that at higher prices, if it's a major purchase, like an automobile, receivables would increase as a proportion of sales, lowering the receivable turnover ratio(since receivables are smaller than sales), and increasing the receivables days

This could be a stretch, but it makes sense also.
sheenalim i think B is correct if we assume that the A/R turnover ratio is greater than 1. in this case an increase in the same amounts in both numerator & denominator would decrease the ratio.
If however A/R turnover ratio is one then the ratio would decrease. But in general the ratio would be greater than 1, as net sales has to be greater than receivables (which is part of the net sales)
smmahmood i agree. an equal increase in both sales/ac-recv. while A/R > 1, would decrease the ratio. for example 300/200 is greater than 400/300. so, A/R will go down and recv. days will incraese.
endurance Receivables turnover = sales/average receivables and DSO (receivable days) = 365/turnover

So if sales goes up, turnover increases and DSO falls.
In A) sales goes up (meaning DSO falls) and in C) discounts reduce receivables, turnover increases and DSO falls
B) Credit sales increases which means turnover falls and DSO increases - go for B
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