$2MM/365 is average daily sales made on credit (so this is the average daily A/R), they are saying that it takes 35 days to collect their accounts receiveable (days sales outstanding)So to see what the A/R balance is you would multiply the avg. daily sales on credit(avg. daily A/R) by the days sales outstanding. The only reason they are using days sales outstanding is beacuse they say all sales were made on credit (this isnt usually the case, you normally have some cash sales and some credit sales), so days sales outstanding is synonymous with avg. receivables collection period. thus, avg. daily A/R x Avg A/R collection period = Average receivables
that way seems more intuitive, alternatively you can calculate it doing the following:
Recievables turnover = 365/avg. A/R collection period (so, 365/35 = 10.43)
then do, avg recievables = net sales/ receivables turnover ( 2,000,000/10.43 = 191780)
I guess the key to the question was to recognize that "days sales outstanding" is really average receivables collection period. to my knowledge they just used this to throw a twist into the question (as i have never seen days sales outstanding before) and wanted you to realize that since all sales are on credit, days sales outstanding = collection period
Edited 1 time(s). Last edit at Sunday, April 15, 2007 at 11:22PM by patkeenan.