Question

Q 8.31: The financial statements of Baker Company report net sales of $500,000 and accounts receivable of $10,000 and $15,000 at the beginning of the year and end of year, respectively. What is the average collection period for accounts receivable in days

Answer 1

Answer:

The average collection period for accounts receivable in 9. 1 or 9 days

Explanation:

The average collection period for accounts receivable in days is computed as using the formula:

Average collection period for accounts receivable = 365 / Accounts Receivable Turnover Ratio

Computing Accounts Receivable Turnover Ratio as:

Accounts Receivable Turnover Ratio = Net Sales / Average Net Accounts Receivable

where

Net sales is $500,000

Average Net Accounts Receivable is as:

Average Net Accounts Receivable = Beginning Accounts Receivable + Ending Accounts Receivable / 2

= $10,000 + $15,000 / 2

= $25,000 / 2

= $12,500

Putting the values above:

= 500,000/12,500

Accounts Receivable Turnover Ratio = 40

Now, putting the values above in the formula of Average collection period of Accounts Receivable:

= 365 / 40

Average collection period of Accounts Receivable = 9.1 days or 9 days