Question

Red Company has the following information: Net credit sales = $400,000 Net income = $100,000 Average total assets = $80,000 Average accounts receivable = $20,000 What is Red's average collection period (rounded to the nearest whole day)?

A) 73 days.
B) 18 days.
C) 9 days.
D) 5 days.

Answer 1

The average collection period for Red Company is approximately 18 days.

Step-by-step explanation:

The average collection period is a financial metric that measures the average number of days it takes for a company to collect payment from its customers after a sale is made. To calculate the average collection period, we use the formula:

Average Collection Period = (Accounts Receivable / Net Credit Sales) * Number of Days

Given that Red Company has Net Credit Sales of $400,000 and Average Accounts Receivable of $20,000, we can calculate the average collection period as:

(20,000 / 400,000) * 365 days = 18.25 days

Thus, the average collection period for Red Company is approximately 18 days.