A firm submits their financial records to a bank.Upon examination,the bank discovers that this firm has $500 in cash,$2,500 in accounts receivables,$1,000 in inventory,$5,000 in plant and equipment and that their assets totaled $9,000.In addition this bank discovered that the firm had $2,000 in current liabilities,$2,500 in long-term debt,and $4,500 in net worth.Finally,this bank discovered that this firm had $20,000 in net sales (all of which are on credit)and $2,000 in net income.What is this firm's average collection period?

Question

Quizplus · Accepted Answer

To find the average collection period, we need to divide the accounts receivable by the average daily credit sales. 
Average daily credit sales can be calculated by dividing the net credit sales by the number of days in the period. 
Net credit sales = Total sales - cash sales = $20,000 - $0 = $20,000 
Number of days in the period = 365 days 
Average daily credit sales = $20,000 / 365 = $54.79 
Accounts receivable turnover ratio = Net credit sales / Average accounts receivable 
Accounts receivable turnover ratio = $20,000 / $2,500 = 8 
Average collection period = 365 days / Accounts receivable turnover ratio 
Average collection period = 365 days / 8 = 45.63 days 
Therefore, the best choice is B) 45 days.

A Firm Submits Their Financial Records to a Bank