Question

A firm has sales of $26 million, and 20 percent of the sales are for cash. The year-end accounts receivable balance is $160,000, 

What is the average collection period? (Use a 360-day year. Do not round intermediate calculations. Round your final answer to 2 decimal places.) 

Average collection period = _______ days

Answer 1

First we will calculate the accounts receivables turnover ratio as per below:

Accounts receivables turnover ratio = Credit sales / Accounts receivables

Credit sales = 80% * $2600000 = $2080000

Accounts receivables = $160000

Putting the values in the above formula, we get,

Accounts receivables turnover ratio = $2080000 / $160000

Accounts receivables turnover ratio = 13

Now, we will calculate the average collection period as per below:

Average collection period = 365 / Accounts receivable turnover ratio

Putting the values in the above formula, we get,

Average collection period = 360 / 13

Average collection period = 27.69 days