Credit Sales versus Cash Sales

Credit Sales versus Cash Sales

A difficulty in computing receivables’ liquidity is the problem of credit sales versus cash sales. Net
sales includes both credit sales and cash sales. To have a realistic indication of the liquidity of receivables, only the credit sales should be included in the computations. If cash sales are included, the liquidity will be overstated.

The internal analyst determines the credit sales figure and eliminates the problem of credit sales
versus cash sales. The external analyst should be aware of this problem and should not be misled by
the liquidity figures. The distinction between cash sales and credit sales is not usually a major problem for the external analyst because certain types of businesses tend to sell only on cash terms, and others sell only on credit terms. For example, a manufacturer usually sells only on credit terms. Some businesses, such as a retail department store, have a mixture of credit sales and cash sales.
In cases of mixed sales, the proportion of credit and cash sales tends to stay rather constant. Therefore, the liquidity figures are comparable (but overstated), enabling the reader to compare figures from period to period as well as figures of similar companies.