Which of the following statements about the days’ sales uncollected ratio is FALSE?

• A. The days’ sales uncollected ratio is calculated as (Accounts Receivable ÷ Net Sales) × 365.
• B. A lower days’ sales uncollected ratio generally suggests better cash flow management.
• C. The ratio helps assess the liquidity of a company’s receivables.
• D. A higher days’ sales uncollected ratio indicates that receivables are being collected more quickly.

Answer: (D)

Verified step by step guidance

1. Understand the concept of the days’ sales uncollected ratio: This ratio measures how quickly a company collects cash from its accounts receivable. It is an indicator of the liquidity of receivables and cash flow management.
2. Review the formula for calculating the days’ sales uncollected ratio: \( \text{Days' Sales Uncollected Ratio} = \frac{\text{Accounts Receivable}}{\text{Net Sales}} \times 365 \). This formula calculates the average number of days it takes for a company to collect its receivables.
3. Analyze the implications of a lower ratio: A lower days’ sales uncollected ratio generally suggests better cash flow management, as it indicates that receivables are being collected more quickly.
4. Evaluate the statement about a higher ratio: A higher days’ sales uncollected ratio does not indicate faster collection of receivables. Instead, it suggests slower collection, which could signal potential liquidity issues or inefficiencies in cash flow management.
5. Identify the false statement: Based on the analysis, the statement 'A higher days’ sales uncollected ratio indicates that receivables are being collected more quickly' is false because it contradicts the correct interpretation of the ratio.