Which of the following statements is true of the average collection period?
A) Generally, the larger the average collection period ratio the better.
B) Average collection periods under 30 days are considered to be very strong.
C) The average collection period is computed by dividing accounts payable by average daily credit sales.
D) Average collection period ratios are classified under leverage ratios.

Question

Quizplus · Accepted Answer

Average collection periods under 30 days are considered to be very strong because it indicates that the company is collecting its accounts receivable quickly, which improves its cash flow and reduces the risk of bad debts. Generally, a lower average collection period is better, as it indicates that customers are paying their bills promptly. The average collection period is computed by dividing accounts receivable by average daily credit sales, not accounts payable. Average collection period ratios are classified under liquidity ratios, not leverage ratios.

Which of the Following Statements Is True of the Average