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In accounting, companies use days payable outstanding or days sales receivables in order to make accurate estimations of the outstanding accounts receivable. However, it is critical to note that the given estimation is measures in sales days averages and not in currency units.

Explanation:

Days Sales ratio formula is DSO for year = (Accounts Receivable * 365) / (Sales on Credit or Revenue). It characterizes the average period of time during which funds from customers arrive at the settlement accounts of the enterprise. Hence its other common name and abbreviation – average collection period (ACP).

Days sales calculation plays a critical role in determining the average period of outstanding accounts. The lower the value of this indicator, the more favorable the conditions for the enterprise.

The accounts receivable turnover ratio calculated on the basis of the financial statements shows the average value of the turnover for the period on the basis of which it is impossible to draw an accurate conclusion about the financial condition of the enterprise.

The assessment of receivables turnover based on financial reporting indicators does not provide reliable information, since the total amount of receivables and total revenue are aggregated indicators. If the number of receivables is the quarter of the annual revenue, this does not mean that its turnover period is 90 days and all of it is repaid within this period.

Such an indicator may mean that one counterparty pays for the products within 30 days, and the other within 180 days. For a more accurate assessment of receivables turnover, it is necessary to analyze it in dynamics over several periods separately for different counterparties.