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The number of days' sales in accounts receivable can be calculated in two different ways, both of which are two-step processes. (1) Calculate the accounts receivable turnover ratio, then divide the number of days in the year by the accounts receivable turnover ratio. The accounts receivable turnover ratio is net credit sales divided by average accounts receivable. Average accounts receivable is the average of the beginning and ending receivable balances, or ($68,000 + $47,000) / 2, which equals $57,500. Since we are not told that Cornwall made any cash sales, we must assume that all sales were on credit. The accounts receivable turnover ratio is $900,000 / $57,500, which equals 15.65 times. 360 / 15.65 = 23 days. (2) Divide the annual credit sales by the number of days in the year to find the amount of credit sales made per day. Then divide average accounts receivable by the amount of credit sales made per day to find the number of days' sales in receivables. $900,000 / 360 = $2,500. $57,500 / $2,500 = 23 days. You can use either of these formulas to find the number of days' sales in receivables. Whichever one makes the most sense to you is the one you should use, because you will have less trouble learning it.
This answer results from using year-end accounts receivable instead of the average balance in accounts receivable during the year. The number of days' sales in accounts receivable can be calculated in two different ways, both of which are two-step processes. (1) Calculate the accounts receivable turnover ratio, then divide the number of days in the year by the accounts receivable turnover ratio. The accounts receivable turnover ratio is net credit sales divided by average accounts receivable. (2) Divide the annual credit sales by the number of days in the year to find the amount of credit sales made per day. Then divide average accounts receivable by the amount of credit sales made per day to find the number of days' sales in receivables.
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This is not the correct answer. Please see the correct answer for an explanation. We have been unable to determine how to calculate this incorrect answer choice. If you have calculated it, please let us know how you did it so we can create a full explanation of why this answer choice is incorrect. Please send us an email at support@hockinternational.com. Include the full Question ID number and the actual incorrect answer choice -- not its letter, because that can change with every study session created. The Question ID number appears in the upper right corner of the ExamSuccess screen. Thank you in advance for helping us to make your HOCK study materials better.