Hello all,
I was solving this question and need some help please.
Which of the following is an indication of a company is prematurely recognizing revenue compared to its competitors.
1-asset turnover is decreasing
2- receivable turnover is increasing
3-days sales outstanding is increasing
Some assumptions
If sales are are being recognised too early, presumable customers are not paying and receivables are also increasing. Initial Sales . Receivables… Assets don’t change
Make up some numbers and use simple ratios without averages
Sales grow 1000 to 1200
Receivables grow 200 to 400
Assets no change at 1000
AT = Sales / Assets
Goes from 1000/1000 = 1x to 1200/1000 1.2x (increase)
RT = Sales / Recivables
Goes from 1000/200 = 6x to 1200/400 1.2x (decrease)
DSO = ( Receivabes / Ssles ) x 365
Goes from (200 /1000) x 365 = 73 to (400/1200) x 365 = 91 (increase)
If a company book sales early, and not collecting cash DSO will increase.