High Inc.has an accounts receivable turnover ratio of 7.3.Low Company has an accounts receivable turnover ratio of 5.Assuming that High and Low have the same sales level,which of the following statements is correct?
A) High's average collection period is less than Low's.
B) Low's average collection period is less than High's.
C) High has a higher accounts receivable balance on average than does Low Company.
D) Low Company has (on average) a lower accounts receivable balance than does High.

Question

Quizplus · Accepted Answer

The accounts receivable turnover ratio is calculated by dividing net credit sales by the average accounts receivable balance. Since the sales level is the same for both companies, the difference in their accounts receivable turnover ratios indicates a difference in their average collection periods. A higher turnover ratio indicates a shorter average collection period, so High's average collection period is less than Low's. The information provided does not allow us to determine the average accounts receivable balance for either company.

High IncHas an Accounts Receivable Turnover Ratio of 7