Question

Stanley, Inc.'s 2018 income statement reported net sales of $6,000,000, uncollectible accounts expense of $160,000, and net income of $7,000,000. Stanley's average accounts receivable during 2018 amounted to $1,200,000. Using 360 days a year, Stanley's
a. accounts receivable turnover rate is approximately 4.4 times

b. accounts receivable turnover rate is approximately 2.5 times

c. average numbers of days to collect an account receivable is 72 days

d. accounts receivable turnover rate is approximately 2 times

Answer 1

Answer:

d.   Account receivable days = 72 days

Explanation:

The average receivable days. This is the average length of time it takes a business to collect the amount due from its customers in respect of  credit sales.

When a business sells on credit , customers are expected to settle their account within a given credit period. Account receivable days is computed to evaluate how well a business is managing its investment in the account  receivables.

The shorter the better, as it means that custmers are paying on time, thereby preserving cash position for the business and reducing the risk bad debt.

A prolonged account receivable days means a poor credit control system  which comes with the attendants risk bad debt and additional financing costs for the business.

To compute the account receivable days (debtors collection period), use this formula:

Account receivable days= (Average account receivable/Credit sales) × 360 days.

So we apply this to the question:

Account receivable days= ( 1,200,000/6,000,000) × 360 days

                               = 72 days