Question

Company A has a shorter Average Collection Period than Company B using the formula 365 / (Credit Sales / Average AR Balance). Which of the following statements is true regarding these two companies?
Company A has a lower percentage of credit sales than Company B.Company A is more efficient in collecting receivables from customers than Company B.Company A is more efficient in generating revenue than Company B.

Answer 1

Answer:

Statement B is correct

Explanation:

Provided Information that,

Company A has shorter Average Collection Period than Company B,

Average Collection Period refers to the period in which the cash is collected from debtors.

Thus in the given statements only statement B states that Company A is more efficient in collecting receivables from debtors, thus it is the correct statement.

Statement A is wrong as Company A has less Average Collection Period, thus it's credit sales percentage would be higher than Company B.

Statement C which states about generating revenue is not correct as the company might have cash sales.

Statement B is correct