On average your ﬁrm sells $43,209 of items on credit each day. Your average inventory period is 32 days and your operating cycle is 57 days. What is your average accounts receivable balance?

Question

Quizplus · Accepted Answer

To find the average accounts receivable balance, we need to first calculate the average accounts receivable turnover, which is the number of times per year that a company collects its average accounts receivable balance.

Accounts Receivable Turnover = (Total Credit Sales) / (Average Accounts Receivable Balance)

Since the firm sells $43,209 of items on credit each day, its total credit sales per year can be calculated as follows:

Total Credit Sales = (Credit Sales per Day) x (Number of Days in a Year) = $43,209 x 365 = $15,767,385

To find the average accounts receivable balance, we need to calculate the average number of days that it takes for the firm to collect its accounts receivable. This is done by adding the average inventory period (32 days) to the average collection period (which is the remaining number of days in the operating cycle after the inventory period):

Average Collection Period = Operating Cycle - Average Inventory Period 
= 57 days - 32 days = 25 days

Therefore, the average accounts receivable turnover is:

Accounts Receivable Turnover = (Total Credit Sales) / (Average Accounts Receivable Balance) 
= $15,767,385 / ((25 days / 365 days) x $43,209)
= $15,767,385 / $2,949,442
= 5.343 times per year

Now, we can use the average accounts receivable turnover to calculate the average accounts receivable balance as follows:

Average Accounts Receivable Balance = (Credit Sales Per Day) x (Average Collection Period)
= $43,209 x 25 
= $1,080,225

Therefore, the answer is C.

On Average Your ﬁRm Sells $43,209 of Items on Credit