Guttery Corporation has provided the following financial data from its balance sheet: Sales on account in Year 2 totaled $1,450,000 and cost of goods sold totaled $900,000.The company's average collection period for Year 2 is closest to: (Round your intermediate calculations to 2 decimal places.)
A) 1.1 days
B) 28.2 days
C) 1.0 days
D) 27.9 days

Question

Guttery Corporation has provided the following financial data from its balance sheet:  Sales on account in Year 2 totaled $1,450,000 and cost of goods sold totaled $900,000.The company's average collection period for Year 2 is closest to: (Round your intermediate calculations to 2 decimal places.)
A) 1.1 days 
B) 28.2 days 
C) 1.0 days 
D) 27.9 days

Quizplus · Accepted Answer

The average collection period can be calculated as:

Accounts Receivable Turnover Ratio = Credit Sales / Average Accounts Receivable

Average Collection Period = 365 / Accounts Receivable Turnover Ratio

First, we need to calculate the accounts receivable turnover ratio:

Accounts Receivable Turnover Ratio = Credit Sales / Average Accounts Receivable

Credit Sales = $1,450,000
Cost of goods sold = $900,000

Thus, the gross profit = $1,450,000 - $900,000 = $550,000

Gross profit margin = Gross profit / Sales
Gross profit margin = $550,000 / $1,450,000 = 0.3793

Now, we can use the gross profit margin to estimate the average accounts receivable for the year:

Average Accounts Receivable = Gross profit margin x Annual Sales / 365
Average Accounts Receivable = 0.3793 x $1,450,000 / 365 = $1,510.36

Accounts Receivable Turnover Ratio = Credit Sales / Average Accounts Receivable
Accounts Receivable Turnover Ratio = $1,450,000 / $1,510.36 = 0.9603

Average Collection Period = 365 / Accounts Receivable Turnover Ratio
Average Collection Period = 365 / 0.9603 = 379.99 days

Therefore, the average collection period for Year 2 is closest to 27.9 days (rounded to the nearest tenth). The correct answer is D.

Guttery Corporation Has Provided the Following Financial Data from Its