Which one of the following statements is correct if a firm has a receivables turnover measure of 10?
A) It takes a firm 10 days to collect payment from its customers.
B) It takes a firm 36.5 days to sell its inventory and collect the payment from the sale.
C) It takes a firm 36.5 days to pay its creditors.
D) The firm has an average collection period of 36.5 days.
E) The firm has ten times more in accounts receivable than it does in cash.

Question

Quizplus · Accepted Answer

A receivables turnover measure of 10 indicates that the firm collects its accounts receivable 10 times per year. To determine the average collection period, we divide 365 days (the number of days in a year) by 10 to get 36.5 days. Therefore, choice D is correct. Choice A is incorrect because it assumes that the firm's credit terms with customers are net 10 days. Choice B is incorrect because it refers to inventory turnover, not receivables turnover. Choice C is incorrect because it refers to payables turnover, not receivables turnover. Choice E is incorrect because it makes an unsupported assumption about the firm's cash and accounts receivable balances.

Which One of the Following Statements Is Correct If a Firm