Question

Home Systems has sales of $312,800, cost of goods sold of $218,400, inventory of $46,300, and accounts receivable of $62,700. How many days, on average, does it take the firm to collect payment on the sale? Is the firm more or less efficient than its competition that has 90 days’ sales outstanding?

73.16 days, more efficient

104.79 days, less efficient

73.16 days, less efficient

104.79 days, more efficient

4.99 days, more efficient

Answer 1

The average collection period is computed as shown below:

= ( Accounts receivable / Sales ) x 365

= ( $62,700 / $ 312,800 ) x 365

= 73.16 days Approximately

The average collection period denotes in how many days on an average the firm is able to collect its receivables. The lower the average collection period, the better it is.

Since the average collection period of 73.16 days is lower than 90 days, it denotes that the firm is more efficient.

So the correct answer is option of 73.16 days, more efficient

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