Question

A firm has sales of $1.8 million, and 20 percent of the sales are for cash. The year-end accounts receivable balance is $225,000. What is the average collection period? (Use a 360-day year. Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Answer 1

Answer:

The average collection period is 56.25 days

Explanation:

The average collection period is the number of days' sales in receivables and calculated by using following formula:

The number of days' sales in receivables = 360/Accounts receivable turnover ratio

Accounts Receivable Turnover = Net Credit Sales/Accounts Receivable

Net Credit sales = Total Sales - the sales are for cash = $1,800,000 - 20% x $1,800,000 = $1,440,000

Accounts Receivable Turnover = $1,440,000/$225,000 = 6.4 times

The number of days' sales in receivables = 360/6.4 = 56.25 days