Excerpts from Shelton Corporation's most recent balance sheet appear below: Sales on account in Year 2 amounted to $1,320 and the cost of goods sold was $890.
-The average collection period for Year 2 is closest to:
A) 1.1 days
B) 69.1 days
C) 0.9 days
D) 66.4 days

Question

Excerpts from Shelton Corporation's most recent balance sheet appear below:  Sales on account in Year 2 amounted to $1,320 and the cost of goods sold was $890.
-The average collection period for Year 2 is closest to:
A) 1.1 days 
B) 69.1 days 
C) 0.9 days 
D) 66.4 days

Quizplus · Accepted Answer

To calculate the average collection period, we use the accounts receivable turnover ratio, which is calculated as follows:

Accounts receivable turnover = Sales on account / Average accounts receivable

Average collection period = 365 days / Accounts receivable turnover

We know that sales on account in Year 2 were $1,320. To calculate the average accounts receivable, we use the following formula:

Average accounts receivable = (Beginning accounts receivable + Ending accounts receivable) / 2

Based on the balance sheet, the beginning accounts receivable was $335 and the ending accounts receivable was $485. Therefore, the average accounts receivable is:

Average accounts receivable = ($335 + $485) / 2 = $410

Now, we can calculate the accounts receivable turnover:

Accounts receivable turnover = $1,320 / $410 = 3.22

Finally, we can calculate the average collection period:

Average collection period = 365 days / 3.22 = 113.35 days, which is closest to 66.4 days (answer choice D).

Excerpts from Shelton Corporation's Most Recent Balance Sheet Appear Below