The collection ratio, defined as AR divided by 365, represents what?

• A. Average number of days to collect
• B. Average daily sales
• C. Accounts Receivable Turnover
• D. Debt Collection Period

Answer: (A)

The main idea is to understand how long receivables stay outstanding on average. Dividing accounts receivable by 365 turns the yearly amount into a daily figure, which serves as a proxy for how much receivable is tied up each day. Interpreting that daily figure in terms of cash collection leads to an estimate of the average number of days it takes to collect. So this ratio is used to gauge the time needed to convert receivables into cash, i.e., the average days to collect. It’s not the same as average daily sales (which would use annual sales, not AR) or accounts receivable turnover (which is sales divided by AR). Debt collection period is another way to refer to days to collect, which aligns with the concept, but the AR/365 form specifically reflects the daily amount tied up, hence the days-to-collect interpretation.