Question

Firm has $42,900 in receivables and $211,800 in TA. The TAT rate is 1.40 and the PM is 5.2%. How long on average does it take the firm to collect its receivables?

Answer 1

To calculate the average collection period, divide the Total Assets by the Turnover Asset ratio to find Total Sales. Then, use the formula (Accounts Receivable / Total Sales) x 365 to calculate the Average Collection Period. It takes approximately 103.08 days for the firm to collect its receivables.

Step-by-step explanation:

To calculate the average collection period, we need to use the formula: Average Collection Period = (Accounts Receivable / Total Sales) x 365. First, we need to find the Total Sales. We can do this by dividing the Total Assets by the Turnover Asset ratio: Total Sales = Total Assets / TAT ratio. Plugging in the given values, we have Total Sales = $211,800 / 1.40 = $151,285.71. Next, we can calculate the Average Collection Period using the formula: Average Collection Period = (Accounts Receivable / Total Sales) x 365 = ($42,900 / $151,285.71) x 365 = 103.08 days. Therefore, it takes, on average, approximately 103.08 days for the firm to collect its receivables.