Definition
Days sales outstanding is accounts receivable divided by credit sales for the period, multiplied by the number of days in the period. It converts the receivable balance into the number of days of sales still uncollected. Using average receivables smooths seasonality, while year-end receivables show where the balance sits at the reporting date.
Why it matters in an audit or review
The measure is a standard expectation in AU-C 520 analytical procedures. A rise with no change in credit terms can point to fictitious sales, channel stuffing, slow-paying customers or an understated allowance. A fall can mean sales were booked after year-end or that receivables were sold. The result tells the auditor where to focus confirmations under AU-C 505 and cutoff testing.
Example
Illustrative: year-end receivables of $450,000 and annual credit sales of $3,650,000 give 450,000 / 3,650,000 x 365 = 45 days. If terms are net 30 and the prior year was 36 days, the team asks why collections slowed.
Common mistakes
- Using total sales when some sales are cash sales.
- Comparing periods of different length without adjusting the day count.
Sources
- AICPA, AU-C Section 520, Analytical Procedures
- AICPA, AU-C Section 505, External Confirmations
- FASB ASC 326-20, Financial Instruments, Credit Losses, Measured at Amortized Cost
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error