How do you calculate the receivable balance?

How do you calculate the receivable balance?

• A. Annual sales ÷ 365
• B. Annual purchases x 12
• C. Annual sales x (receivable days/365)
• D. Gross profit x 365 ÷ receivable days

Answer: (C)

The key idea is linking sales to the time customers take to pay. If annual credit sales are S and, on average, customers settle their accounts after D days, then the amount tied up in receivables is the daily credit sales times the average collection period. Daily credit sales are S/365, so the average receivable balance is (S/365) × D, which simplifies to S × (D/365). That’s why the correct approach is annual sales multiplied by the fraction of the year represented by the receivable days. The other options misapply the data: daily sales alone isn’t the receivable balance, purchases relate to payables, and using gross profit with days doesn’t reflect how receivables accumulate.

The key idea is linking sales to the time customers take to pay. If annual credit sales are S and, on average, customers settle their accounts after D days, then the amount tied up in receivables is the daily credit sales times the average collection period. Daily credit sales are S/365, so the average receivable balance is (S/365) × D, which simplifies to S × (D/365).

That’s why the correct approach is annual sales multiplied by the fraction of the year represented by the receivable days. The other options misapply the data: daily sales alone isn’t the receivable balance, purchases relate to payables, and using gross profit with days doesn’t reflect how receivables accumulate.