What is the formula for the days in receivable turnover ratio?

The formula for the days in receivable turnover ratio, also known as the average collection period, is derived from the relationship between accounts receivable, sales, and the turnover of those receivables. The appropriate way to calculate this ratio is to take the number of days in a year, which is typically 365, and divide it by the accounts receivable turnover ratio.

The accounts receivable turnover ratio itself measures how efficiently a company collects its receivables by indicating how many times receivables are collected in a given time period. Therefore, by dividing 365 by this turnover ratio, you can find the average number of days it takes to collect on those receivables.

Understanding this concept is vital for assessing a company's efficiency in managing its credit sales and cash flow. A lower average collection period indicates that the company is collecting receivables more quickly, which is generally a positive sign of financial health.

The other formulas listed do not accurately represent the calculation for the days in receivable turnover ratio, as they either misuse components of sales or the turnover ratio itself.