When determining the average collection period (Days Sales Outstanding), how is the accounts receivable turnover ratio calculated?

• A. Net Credit Sales divided by Total Assets
• B. Average Accounts Receivable divided by Total Sales
• C. Net Credit Sales divided by Average Accounts Receivable
• D. Average Accounts Receivable divided by Net Credit Sales

Answer: (C)

Verified step by step guidance

1. Understand the concept: The accounts receivable turnover ratio measures how efficiently a company collects its receivables. It is calculated by dividing Net Credit Sales by Average Accounts Receivable.
2. Step 1: Identify the Net Credit Sales. This represents the total sales made on credit during a specific period, excluding cash sales.
3. Step 2: Determine the Average Accounts Receivable. This is calculated by taking the sum of the beginning and ending accounts receivable balances for the period and dividing by 2.
4. Step 3: Use the formula for accounts receivable turnover ratio: $\frac{\mathrm{Net\; Credit\; Sales}}{\mathrm{Average\; Accounts\; Receivable}}$
5. Step 4: Once the accounts receivable turnover ratio is calculated, it can be used to determine the average collection period (Days Sales Outstanding) by dividing the number of days in the period (e.g., 365 days for a year) by the accounts receivable turnover ratio.