Chartered Financial Analyst (CFA) Level 1 Practice Exam

Which of the following ratios focuses specifically on the efficiency of collecting receivables?

1. Inventory Turnover

2. Days Sales Outstanding

3. Working Capital Turnover

4. Payable Turnover

The correct answer is: Days Sales Outstanding

The focus of the ratio that specifically assesses the efficiency of collecting receivables is Days Sales Outstanding (DSO). This ratio measures the average number of days it takes for a company to collect payment after a sale has been made. It is calculated by taking accounts receivable, dividing it by total credit sales for a period, and then multiplying by the number of days in that period. A lower DSO indicates that a company collects its receivables more quickly, while a higher DSO may suggest inefficiencies in the collection process or issues with credit policies. In the context of the other ratios, Inventory Turnover measures how efficiently a company manages and sells its inventory, Working Capital Turnover assesses how well a company uses its working capital to generate sales, and Payable Turnover evaluates how quickly a company pays off its suppliers. While all these ratios provide valuable insights into a company's financial performance, only Days Sales Outstanding specifically targets the efficiency of collecting receivables.