A company can be judged to be collecting payments rapidly if it has a low number of which of the following?

• A. Net credit sales
• B. Allowance for doubtful accounts
• C. Days sales outstanding (DSO)
• D. Gross accounts receivable

Answer: (C)

Verified step by step guidance

1. Understand the concept of Days Sales Outstanding (DSO): DSO is a financial metric that measures the average number of days it takes a company to collect payment after a sale has been made. A lower DSO indicates faster collection of receivables.
2. Identify the formula for DSO: The formula is \( \text{DSO} = \frac{\text{Accounts Receivable}}{\text{Net Credit Sales}} \times \text{Number of Days} \). This formula helps calculate the average collection period.
3. Analyze the relationship between DSO and payment collection: A low DSO means the company is efficient in collecting payments from customers, while a high DSO may indicate delays in payment collection or issues with credit policies.
4. Compare DSO with other metrics: Net credit sales, allowance for doubtful accounts, and gross accounts receivable are important metrics, but DSO specifically focuses on the time taken to collect payments, making it the most relevant indicator for judging payment collection speed.
5. Apply the concept: To evaluate a company's payment collection efficiency, calculate its DSO using the formula and compare it to industry benchmarks or historical data to determine if the company is collecting payments rapidly.