Question

An analyst observed a decrease in a company’s days in sales outstanding (DSO). Which of the following could explain this trend?

A. The company agreed on more lenient credit terms with its suppliers.

B. Due to a general economic downturn, customers needed to delay payments to the company

C. The company increased the allowance for doubtful accounts this year.

D. The company adopted more lenient credit terms for its customers

Answer 1

Days of Sales outstanding (DSO)=365/Accounts Receivable Turnover

Accounts Receivable Turnover =Net Credit Sales/Accounts Receivable

DSO=(365*(Accounts Receivable))/(Net Credit sales)

DSO will decrease if:

Accounts Receivable decreases, with constant Sales

If Credit terms are more lenient, the accounts receivable will increase and consequently, the DSO will increase.

If customers delay payment, the accounts receivable will increase and consequently, the DSO will increase

If company increases allowance for doubtful accounts, the net accounts receivable will decrease.

Consequently, Days of Sales Outstanding will decrease

C. The company increased the allowance for doubtful accounts this year