Final answer:
The average collection period is the time it takes for a company to collect payments from its customers. Assuming all sales are on credit, and using the formula (Average Receivables / Total Credit Sales) x Number of Days, we find that the firm's average collection period is approximately 97 days.
Step-by-step explanation:
To calculate the average collection period, we use the formula:
Average Collection Period = (Average Accounts Receivable / Total Credit Sales) × Number of Days in Period
The student stated that the firm starts the year with receivables of $80,000. Assuming the $300,000 sales were all on credit, we take the average receivables, which, in the absence of ending receivables, will be the beginning receivables of $80,000. As for the number of days, typically a year has 365 days.
So, the average collection period is calculated as follows:
(Average Receivables / Total Credit Sales) × Number of Days in Period = ($80,000 / $300,000) × 365 = 0.2667 × 365 ≈ 97.34 days
The average collection period for the firm is thus approximately 97 days. This means that, on average, it takes the company 97 days to collect payment after a sale is made on credit.