Question

"A firm has $400,000 in credit sales and $100,000 in accounts receivable. Compute accounts receivable turnover and average number of collection days. How do these numbers relate to the terms of 2/10 net/30?"

Answer 1

Answer:

45 days

Explanation:

Data provided

Credit Sales = $400,000

Accounts receivable turnover ratio = Credit Sales ÷ Average Accounts Receivables

= $400,000 ÷ ($100,000 + 0) ÷ 2

= 8 times

Average number of collection days = 360 ÷ Accounts Receivable turnover ratio

= 360 ÷ 8

= 45 days

Therefore for computing the average number of collection days we simply divide accounts receivable turnover ratio  by 360.