Which formula correctly calculates the trade receivables collection period (in days)?

Which formula correctly calculates the trade receivables collection period (in days)?

• A. trade receivables / revenue x 365
• B. revenue / trade receivables x 365
• C. trade payables / COS x 365
• D. COS / revenue x 365

Answer: (A)

This question tests how to convert the receivables balance into the time it takes to collect cash from customers. The trade receivables collection period in days comes from the receivables turnover concept: annual credit sales divided by average trade receivables gives the turnover rate, and 365 divided by that turnover gives the number of days customers take to pay. In formula form, days = (average trade receivables / credit sales) × 365. If you approximate credit sales with total revenue and use the year-end or average receivables, you get trade receivables / revenue × 365. That is why this form is the correct expression: it translates the balance of receivables into an average collection period in days. The other forms aren’t about how long receivables take to be collected: reversing the ratio (revenue over receivables) changes the meaning to a different rate; using cost of sales and trade payables relates to the payables or cost cycles, not the receivables collection period.

This question tests how to convert the receivables balance into the time it takes to collect cash from customers. The trade receivables collection period in days comes from the receivables turnover concept: annual credit sales divided by average trade receivables gives the turnover rate, and 365 divided by that turnover gives the number of days customers take to pay. In formula form, days = (average trade receivables / credit sales) × 365. If you approximate credit sales with total revenue and use the year-end or average receivables, you get trade receivables / revenue × 365. That is why this form is the correct expression: it translates the balance of receivables into an average collection period in days.

The other forms aren’t about how long receivables take to be collected: reversing the ratio (revenue over receivables) changes the meaning to a different rate; using cost of sales and trade payables relates to the payables or cost cycles, not the receivables collection period.