The average collection period (Days Sales Outstanding) is calculated as \(\frac{365}{\text{?}}\). What value should replace the question mark?

• A. Gross Profit Margin
• B. Current Ratio
• C. Inventory Turnover
• D. Accounts Receivable Turnover

Answer: (D)

Verified step by step guidance

1. Understand the formula for the average collection period (Days Sales Outstanding), which is calculated as: $\frac{365}{\mathrm{Accounts\; Receivable\; Turnover}}$. This formula helps measure the average number of days it takes for a company to collect payments from its customers.
2. Recognize that the denominator in the formula represents the Accounts Receivable Turnover, which is a financial ratio that measures how efficiently a company collects its receivables during a given period.
3. Eliminate the incorrect options: Gross Profit Margin, Current Ratio, and Inventory Turnover. These metrics are unrelated to the calculation of Days Sales Outstanding. Gross Profit Margin measures profitability, Current Ratio assesses liquidity, and Inventory Turnover evaluates inventory management efficiency.
4. Focus on Accounts Receivable Turnover, which is calculated as: $\frac{\mathrm{Net\; Credit\; Sales}}{\mathrm{Average\; Accounts\; Receivable}}$. This ratio indicates how many times a company collects its average accounts receivable during a period.
5. Substitute the Accounts Receivable Turnover value into the formula for Days Sales Outstanding to complete the calculation: $\frac{365}{\mathrm{Accounts\; Receivable\; Turnover}}$. This will give the average collection period in days.