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Since it asks for the number of days, this question is asking for the number of days' sales in accounts receivable, not the accounts receivable turnover ratio. The number of days' sales in accounts receivable can be calculated in either of two ways: (1) Calculate the accounts receivable turnover ratio (the number of times accounts receivable "turns over" during a year's time), then divide the number of days in the year by the accounts receivable turnover ratio, as follows: Accounts receivable turnover ratio = Net credit sales for the period / Average accounts receivable. Average accounts receivable is the average of the beginning and ending balances, which is $22,000. Thus, the accounts receivable turnover ratio is $220,000 / $22,000 = 10 times. The number of days' sales in accounts receivable is 365 / 10, which equals 36.5 days. (2) Calculate the amount of credit sales made per day, then divide average accounts receivable by the credit sales made per day, as follows: Net credit sales for the year / number of days in the year = credit sales made per day. Average accounts receivable / credit sales made per day = number of days' sales in accounts receivable. $220,000 / 365 = daily credit sales of $602.74. The number of days' sales in accounts receivable = Average accounts receivable of $22,000 / $602.74, which equals 36.5 days.
This is the days' sales in accounts receivable calculated using the beginning of the year accounts receivable balance. The number of days' sales in accounts receivable should be calculated using the average balance in accounts receivable instead. The average balance is the average of the beginning and ending balances. Whenever we relate an income statement amount such as net credit sales to a balance sheet amount such as accounts receivable, we need to use the average balance of the balance sheet amount, not the beginning or ending balance.
This is the days' sales in accounts receivable calculated using the year end accounts receivable balance. The number of days' sales in accounts receivable should be calculated using the average balance in accounts receivable instead. The average balance is the average of the beginning and ending balances. Whenever we relate an income statement amount such as net credit sales to a balance sheet amount such as accounts receivable, we need to use the average balance of the balance sheet amount, not the beginning or ending balance.