Question

Red Company has the following information: Net credit sales = $400,000 Net income = $100,000 Average total assets = $80,000 Average accounts receivable = $20,000 What is Red's average collection period (rounded to the nearest whole day)?

Answer 1

18 Days

Step-by-step explanation:

Average collection period denotes the number of days between the day when sales are made and invoice is issued to the day when amounts are received. Average collection period is calculated as follows:

Average collection period = (Average Accounts Receivable balance / Credit Sales) * 365

Average collection period = (20,000 / 400,000) * 365 = 18 days.

Note: Usually companies use 365 days for calculation purposes, however 360 days' year can also be used for calculation purposes.