Answer:
Average collection period for 2016= 48.3 days
Average collection period for 2017 = 46.3 days
Explanation:
Colby Company
2017 2016
Accounts receivable (net), end of year $ 550,000 $ 540,000
Net sales on account 4,300,000 4,000,000
At the end of 2015, accounts receivable was $520,000.
Receivables turnover ratio= Net Sales / Average Accounts Receivable
Average Accounts Receivable= Net Receivables for one year + Net Receivables for other year
2016 Receivables turnover ratio= $4,000,000 / $ 540,000 + $520,000./2
Receivables turnover ratio= $4,000,000/$ 530,000
Receivables turnover ratio= 7.547= 7.55
This indicates that average accounts receivable balance is converted into cash 7.55 times during the year 2016.
2017 Receivables turnover ratio= $4,300,000 / $ 540,000 + $550,000./2
Receivables turnover ratio= $4,300,000/$ 545,000
Receivables turnover ratio= 7.889= 7.89
This indicates that net accounts receivable balance is converted into cash
7.89 times during the year 2017.
Average collection period for year 2016 = 365/ Receivables turnover ratio
Average collection period for 2016= 365/7.55= 48.34= 48.3 days
Average collection period for 2017 = 365/Receivables turnover ratio
Average collection period for 2017 = 365/ 7.89= 46.26= 46.3 days
This indicates that accounts receivable are collected in almost 48 days in 2016 and 46 days in 2017
