Question

A firm has sales of $3 million, and 10 percent of the sales are for cash. The year-end accounts receivable balance is $285,000. What is the average collection period? (Use a 360-day year.)

a) 36 days
b) 45 days
c) 72 days
d) 90 days

Answer 1

To find the average collection period of the firm, determine the daily credit sales and divide the accounts receivable balance by this number. The calculation shows an average collection period of approximately 38 days, with the closest provided answer being 36 days.

Step-by-step explanation:

To calculate the average collection period, which is the amount of time it takes for a company to receive payments from its customers, we first need to determine the company's daily credit sales since only 10% of sales are for cash. The firm's total sales are $3 million, so credit sales would be 90% of this amount, which equals $2.7 million. Given a 360-day year, the daily credit sales are $2.7 million / 360 = $7,500 per day.

Next, the average collection period can be calculated using the year-end accounts receivable balance of $285,000. The average collection period is found by dividing the accounts receivable balance by the daily credit sales: $285,000 / $7,500 = 38 days. However, since this number is not an option provided, we may need to consider possibly rounding differences and select the closest answer, which is 36 days (Option a).