Question

Accounts receivable management This table, shows that Blair Supply had an end-of-year accounts receivable balance of $299,875. The table also shows how much of the receivables balance originated in each of the previous six months. The company had annual sales of $2.40 million and it normally extends 30-day credit terms to its customers. a. Use the year-end total to evaluate the firm's collection system. b. If 70% of the firm's sales occur between July and December, would this affect the validity of your conclusion in part a? Explain. a. The average collection period is days. (Round to two decimal places.) Since the average age of receivables is about 16 days beyond the net date, attention should be directed to accounts receivable management. (Select from the drop-down menu.) b. If 70% of the firm's sales occur between July and December, would this affect the validity of your conclusion in parta? (Select all the answers that apply.) A. This may explain the lower turnover and higher average collection period. B. The December accounts receivable balance of 299,875 may not be a good measure of the average accounts receivable, thereby causing the calculated average collection period to be overstated. C. The seasonality of sales also suggests the November figure (0-30 days overdue) is not a cause for great concern. D. About 13% of all accounts receivable (those arising in July, August and September) are sixty days or more overdue and may be a sign of poor receivables management

Answer 1

Accounts Receivable Turnover ratio = Credit Sales/Average accounts receivable

= $2.4 million / $299875

= 8.003335

So, Average Collection period = 365/Accounts Receivable Turnover ratio

= 365/8.003335

= 45.60599

=45.61 days

Since the average age of Receivables is about 16 days beyond the net date, attention should be directed to accounts receivables management. YES , definitely (options are not given )

b) if 70% of the sales occur between July-December, then obviously the accounts receivable are going to be higher, Average Collection period in this case can be calculated to be around 33 days . So, this explains the lower turnover and higher average collection period (option A is correct)

Taking accounts receivables at one point (End of December ) is also not a good way to measure Average Accounts receivable (option B is correct)

$51965 of November is still pending for more than 30 days,This may be a cause of concern even though sales are seasonal. Option C is not correct

Option D is correct as Recievables of July, August and September show poor receivables management