Question

How is the average collection period computed? A : by dividing net credit sales by ending gross accounts receivable B : by dividing 365 days by the accounts receivable turnover ratio C : by dividing net credit sales by average gross accounts receivable D : by dividing the accounts receivable turnover ratio by 365 days

Answer 1

The average collection period is calculated by dividing 365 days by the accounts receivable turnover ratio, which itself is determined by dividing net credit sales by average accounts receivable.

Step-by-step explanation:

The average collection period is computed by dividing 365 days by the accounts receivable turnover ratio. The accounts receivable turnover ratio is calculated by dividing net credit sales by average accounts receivable during the period. The average collection period is an important measure as it indicates how quickly a company is able to collect receivables from its customers.

To calculate this:

1. First, determine the net credit sales for the period.
2. Then, calculate the average accounts receivable by adding the beginning and ending accounts receivable and dividing by two.
3. Next, divide the net credit sales by the average accounts receivable to get the accounts receivable turnover ratio.
4. Finally, divide 365 days by the accounts receivable turnover ratio to find the average collection period.

Answer 2

B : by dividing 365 days by the accounts receivable turnover ratio

The reason for this is that the accounts receivable turnover ratio tells us the efficiency of a company in collecting its receivables. A ratio of 10 tells us that a company collects its average receivables 10 times a year. When we divide 365 by we get 36.5 which suggests that a company takes 36.5 days to collect its average receivables.

Step-by-step explanation: