Answer (A) is correct . The days’ sales in receivables ratio equals the days in the year divided by the receivables turnover ratio (sales ÷ average receivables). Days’ sales may also be computed based only on ending receivables. In either case, use of the natural business year tends to understate the ratio because receivables will usually be at a low point at the beginning and end of the natural year. For example, a ski resort may close its books on May 31, a low point in its operating cycle.
Answer (B) is incorrect because Using a calendar year will not necessarily affect the usefulness of the days’ sales ratio.
Answer (C) is incorrect because Using average receivables would not always understate the ratio. The ratio could be higher or lower depending on changes in sales volume or the percentage of credit to cash sales, or other factors.
Answer (D) is incorrect because The ratio could be higher or lower depending on changes in sales volume or the percentage of credit to cash sales, or other factors.
|
