Question

Star Corporation sells its goods on terms of 2/10, n/30. It has a receivables turnover ratio of 7.00. What is its average collection period (also known as the days in receivable ratio)?

1) 52 days
2) 30 days
3) 2,555 days
4) 2 days

Answer 1

The average collection period is 52 days.

Step-by-step explanation:

The average collection period (also known as the days in receivable ratio) measures the average number of days it takes for a company to collect payment from its customers. It is calculated by dividing the number of days in the period by the accounts receivable turnover ratio.

In this case, the terms 2/10, n/30 mean that customers can receive a 2% discount if they pay within 10 days, otherwise the full amount is due within 30 days.

To find the average collection period, we divide 365 days (a typical period) by the receivables turnover ratio of 7.00:

Average Collection Period = 365 / 7.00 = 52 days

Therefore, the correct answer is 1) 52 days.