Allen Company's average collection period for accounts receivable was 40 days last year,but increased to 60 days this year.Which of the following would most likely account for this change?
A) A decrease in accounts receivable relative to sales.
B) A decrease in sales.
C) A relaxation of credit policies.
D) An increase in sales.

Question

Quizplus · Accepted Answer

An increase in the average collection period indicates that it is taking longer for customers to pay their bills. This could be due to a relaxation of credit policies, which means that the company is giving more time to customers to pay their bills, resulting in a longer average collection period. Option A is incorrect because a decrease in accounts receivable relative to sales would result in a shorter average collection period. Option B is incorrect because a decrease in sales would not have a direct impact on the average collection period. Option D is incorrect because an increase in sales does not necessarily mean an increase in the average collection period.

Allen Company's Average Collection Period for Accounts Receivable Was 40