Which of the following statements is correct? a) If a security saw that a firm’s

Question

Which of the following statements is correct?
a) If a security saw that a firm’s days’ sales outstanding (DSO) was higher than the industry average, and was increasing and trending still higher, this would be interpreted as a sign strength.
b) A high average DSO indicates that none of this customers are paying on time. In addition, it makes no sense to evaluate the firm’s DSO with the firm credit terms.
c) There is no relationship between the days’ sales outstanding DSO and the average collection period ACP. These ratios measure entirely different things.
d) A reduction in accounts receivable would have no effect on the current ratio, but it would lead to an increase in the quick ratio.
e) If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days’ sales outstanding will decline.

Explanation / Answer

(e) If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its day's sales outstanding will decline. For example: Days Sales Outstanding = [Total Receivables / Total Credit Sales] * Number of Days in the measurement period Total Receivables = $5,000,000 Total Credit Sales = $10,000,000 Number of days in period = 90 Days Sales Outstanding = [$5,000,000 / $10,000,000] * 90 Days Sales Outstanding = 45 days If a firm increases its sales while holding its accounts receivables constant and other things held constant; then the Days Sales Outstanding would be: Total Receivables = $5,000,000 Total Credit Sales = $15,000,000 Number of days in period = 90 Days Sales Outstanding = [$5,000,000 / $15,000,000] * 90 Days Sales Outstanding = 30 days Hence, the right option is (e)

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