Which formula correctly defines days sales outstanding (DSO)?

• A. (Accounts Receivable minus Allowance) / Credit Sales
• B. Average Accounts Receivable / Credit Sales
• C. 365 × Average Accounts Receivable / Credit Sales
• D. 12 × Average Accounts Receivable / Credit Sales

Answer: (C)

DSO tells you, on average, how many days it takes to collect on credit sales. To get days, you relate the amount tied up in receivables to the rate of credit sales and convert that ratio into a daily measure. The correct form multiplies the ratio of average accounts receivable to annual credit sales by 365, giving 365 × Average Accounts Receivable ÷ Credit Sales. Use the average AR (often (beginning AR + ending AR)/2) to smooth the period’s fluctuations, and use credit sales because only those create receivables. Subtracting the allowance would convert to net receivables, which is a different metric, and using 12 or 360 would produce months or a different convention rather than days. This combination—average AR in the numerator, credit sales in the denominator, and a 365 multiplier—defines days sales outstanding.