Accounts Receivable (A/R)

Accounts Receivable is money your customers owe to you. It is part of Current Assets.

How Quickly do Accounts Receivable Move Into Cash?

The Days Sales Outstanding ratio shows how quickly Receivables (i.e. the proceeds from Sales) are converted into Cash. It is the average number of days to receive payment, this is automatically shown on the Visual Finance graphic.

     Days Sales Outstanding (DSO)  = Accounts Receivable (A/R) /Average Daily Sales

     where Average Daily Sales = Sales/365

Example: The Round Number Company

Sales = 200; Accounts Receivable = 40

     Average Daily Sales = 200/365 = 0.548

     Days Sales Outstanding (DSO) = 40/0.548 = 73 Days 

Accounts Receivable is aso called Receivables. Often called Debtors outside North America. 

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Calculator for Days Sales Outstanding (DSO)  

     Average Daily Sales = Sales/365

     Days Sales Outstanding (DSO)  = Receivables/Average Daily Sales

 

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Accounts Receivable (A/R)

Acid-Test Ratio

     ATR = Quick Assets/Current Liabilities  

     where Quick Assets = Cash + Receivables + Short-Term Investments

Example: The Round Number Company

Cash = 20; Accounts Receivable = 40; [STI} = 6; Current Liabilities = 36

     Quick Assets =  20 + 40 + 6 = 66

    ZATR =  66/36 = 1.8

The Acid-Test Ratio is a variant of the Current Ratio; it only includes items which are quickly (and easily) converted into cash. It is called ‘Acid-Test’ because it measures the ability to meet unexpected demands without depending on the sale of inventory.

A ratio of 1 is a good benchmark. Higher ratios indicate a satisfactory condition. Decreasing ratios indicate either a deteriorating cash position or a deteriorating demand for products.

“What do you mean by that?”

Another definition of Quick Assets is: Current Assets less Inventories.  This definition includes Prepaid Expenses but they are not always quickly converted to Cash.

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Calculator for ATR 

     Quick Assets = Cash + Receivables + Short-Term Investments

     Quick Ratio = Quick Assets/Current Liabilities

 

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Acid-Test Ratio

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