Question

which of the following would explain a companys day sales outstanding ratio falling from 37.3 to 25?

the companys cost of goods sold has decreased while total sales has remained constant.

the companys cost of goods sold has decreased while total sales has increased.

the companys accounts receivable has decreased while total sales has increased.

the companys accounts receivable has remained constant while total sales has decreased.

Explanation:

Step1: Recall Day Sales Outstanding (DSO) Formula

The formula for DSO is \( \text{DSO} = \frac{\text{Accounts Receivable}}{\text{Net Credit Sales}} \times 365 \) (or similar time period). A decrease in DSO means the ratio \( \frac{\text{Accounts Receivable}}{\text{Sales}} \) has decreased (assuming time period is constant).

Step2: Analyze Each Option

• Option 1: Cost of goods sold (COGS) decrease, sales constant. COGS doesn't directly affect DSO (DSO involves A/R and sales). So this doesn't explain DSO drop.
• Option 2: COGS decrease, sales increase. Again, COGS isn't in DSO formula. Doesn't explain DSO change.
• Option 3: A/R decreased, sales increased. From DSO formula, if A/R (numerator) decreases and sales (denominator, since sales ≈ net credit sales here) increases, the ratio \( \frac{\text{A/R}}{\text{Sales}} \) decreases, leading to lower DSO. This fits.
• Option 4: A/R constant, sales decreased. If sales (denominator) decreases and A/R (numerator) is constant, the ratio \( \frac{\text{A/R}}{\text{Sales}} \) increases, leading to higher DSO. Doesn't fit.

Answer:

The company's accounts receivable has decreased while total sales has increased.