Which statement about accounts receivable is correct?
A)If a security analyst saw that a firm's DSO was higher than the industry average and was increasing and trending still higher, this would be interpreted as a sign of strength.
B)If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its DSO will increase.
C)There is no relationship between the DSO and the ACP. These ratios measure entirely different things.
D)If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding will decline.

Question

Quizplus · Accepted Answer

Days' sales outstanding (DSO) is the average number of days it takes for a company to receive payment after a sale has been made. If a firm increases its sales while holding its accounts receivable constant, it means the company is collecting cash more quickly, and its DSO will decline. An increase in sales while holding accounts receivable constant will not increase DSO, and B is incorrect. A higher DSO is interpreted as a sign of weakness, as it indicates that the company is taking longer to collect payment from its customers, and A is incorrect. There is a relationship between DSO and the average collection period (ACP), as they measure the same thing, with different units. ACP is measured in days, while DSO is measured in days of sales, so C is incorrect.

Which Statement About Accounts Receivable Is Correct