Q: When using the formula for computing accounts receivable days, why is Accounts/Notes Receivable – Other for Total Coverage, Inc. not included in the calculation?
A: The accounts receivable days calculation is intended to depict the efficiency of the company in collecting receivables created during the course of the company’s core, or primary, business operations. As a result, only Accounts Receivable – Trade or similarly titled accounts are used in computing accounts receivable days.
Accounts/Notes Receivable – Other (AR/Notes Rec–Other) is excluded from the calculation because the account title implies that the receivable was sourced outside the company’s core operation of installing floor covering. The account represents money that is due Total Coverage, Inc., possibly from a service or goods provided other than the installation of flooring. Since the title includes a reference to “Notes”, it is possible that the account balance might be money owed the company from an asset sale.
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