Question

Assume a company whose sales are all on account provided the following information: Gross margin percentage 40% Cost of goods sold $ 320,000 Accounts receivable balance, beginning of the year $ 20,000 Accounts receivable balance, end of the year $ 30,000 Net income $ 10,000 The average collection period is closest to:

19.88 days.

21.63 days.

14.88 days.

17.38 days.

Answer 1

The correct answer is 17.38 days.

The average collection period is calculated as follows:

Average collection period = (Change in accounts receivable) / (Average daily sales)
First, we need to calculate the total sales for the year. We know that the gross margin percentage is 40%, so the cost of goods sold represents 60% of the total sales. Therefore, the total sales are:

Total sales = 320,000 / 0.6 = $533,333
Next, we need to calculate the average daily sales. We know that the net income for the year is $10,000, and that the gross margin percentage is 40%. Therefore, the net sales for the year are:

Net sales = 533,333 * 0.4 = $213,333
The average daily sales are then:

Average daily sales = 213,333 / 365 = $585
Finally, we need to calculate the change in accounts receivable. This is the difference between the accounts receivable balance at the beginning of the year and the accounts receivable balance at the end of the year. In this case, the change in accounts receivable is $10,000.

Therefore, the average collection period is:

Average collection period = 10,000 / 585 = 17.38 days