Question

He average collection period is computed by dividing

A) net credit sales by ending gross accounts receivable.
B) 365 days by the accounts receivable turnover.
C) net credit sales by average gross accounts receivable.
D) the accounts receivable turnover by 365 days.

Answer 1

The average collection period is calculated by dividing 365 days by the accounts receivable turnover, providing a measure of how quickly a company collects payments from its customers on credit.

Step-by-step explanation:

The average collection period is an important financial metric that indicates how long it takes a company to collect payments from its credit customers. It is computed by dividing 365 days by the accounts receivable turnover, which can also be understood as the number of times a company collects its average accounts receivable in a year. So, the correct answer to the student's question is:

B) 365 days by the accounts receivable turnover.

The formula can be represented as:

Average Collection Period = 365 days / Accounts Receivable Turnover

This calculation provides insight into the effectiveness of a company's credit policies and accounts receivable management.

Answer 2

B). 365 days by the accounts receivable turnover.

Step-by-step explanation:

This is said to be the time it takes for a business to receive money owed by its client in its amount receivable(AR).

The average collection period formula is the number of days in a period divided by the receivables turnover ratio. The numerator of the average collection period formula shown at the top of the page is 365 days. For many situations, an annual review of the average collection period is considered.