Using total sales instead of credit sales in the accounts receivable turnover calculation can produce misleading results and is a problem primarily for companies that have a material amount of cash sales.

Question

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Total sales include both cash and credit sales, while accounts receivable turnover calculation should only consider credit sales because only credit sales result in accounts receivable. Therefore, if a company has a material amount of cash sales, using total sales instead of credit sales in the calculation can make it seem like the company is collecting its receivables more slowly than it actually is.

Using Total Sales Instead of Credit Sales in the Accounts