Hey all, I have a question that I just ran into that is making my brain hate me..
Proposed JE: Dr. COGS 90
Dr. A/R 100
Cr. Sales 100
Cr. Inventory 90
Now with this JE the question asks for the effect in the Days Sales in A/R. So my logic is that Sales will increase by 100 and A/R will increase. So I need the A/R Turnover ratio first, which is net credit sales/Avg. A/R. Because the denominator is Avg. A/R, the denominator will increase by some amount less than 100. So this would cause the numerator to increase more than the denominator (Num. increases by 100, denominator increases by <100).
We then need to determine Days sales in A/R, so: 365/A/R turnover. If, from what we determine above, the A/R turnover has increased, the Days in A/R Turnover should decrease (denominator increases relative to numerator). However, according to the answer, Days in A/R is supposed to increase, not decrease.
Here's the kicker, the answer gives me this:
Days' Sales in Accounts Receivable = Accounts Receivable / Credit Sales per day, where
Credit Sales per day = Total Credit Sales / 365 days
So.. The entry increases Sales, thus increasing Credit Sales per day. It also increases Accounts Receivable. The net result is an INCREASE in Days’ Sales in Accounts Receivable.
Both of these make complete sense to me logically, but if they are both supposed to calculate the same ratio, why do I get different answers. Can anybody explain what I am doing wrong? My brain is seriously about to explode..
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