Question

This table (pictured), shows that Blair Supply had an end-of-year accounts receivable balance of $300,035. 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.)

Answer 1

THE AVERAGE COLLECTION PERIOD OF YEAR IS CALCULATED BY AMOUNT RECEIVABLE DURING THE YEAR DIVIDE BY TOTAL SALES TURNOVER DURING THE PERIOD MULTIPLIED BY NO OF DAYS DURING THE PERIOD

(A )SO THE TOTAL SALES OF THE YEAR = $ 2.4 MILLION

AND AMOUNT COLLECTED =$300035

SO AVERAGE COLLECTION PERIOD = 300035 /2400000*365

=45.63

SO AVERAGE COLLECTION PERIOD OF COMPANY IS 45.63 DAYS

(B) IF 70 % SALES HAPPENED IN BETWEEN JULY TO DECEMBER

I.E 70% OF 2.4 MILLION =1.68 MILLION

TOTAL DAYS DURING JULY TO DECEMBER MONTHS=184 DAYS

SO AVERAGE COLLECTION PERIOD OF 6 MONTHS WILL BE

= 300035/1680000*184

=32.86

SO AVERAGE COLLECTION OF 6 MONTHS = 32.86 DAYS

HERE IT SHOWS THAT AVERAGE COLLECTION PERIOD OF LAST 6 MONTHS IS 32.86 DAYS IN COMPARSION TO WHOLE YEAR i.e 45.63 DAYS BECAUSE IN POINT ( A ) WE HAVE EVALUATED THE AVERAGE COLLECTION PERIOD ON YEARLY BASIS WHEARAS THE RECEIVABLES WHERE AVAILABLE FOR 6 MONTHS SO THE COLLECTION PERIOD CANNOT BE JUSTFIED THERE AS CORRECT .

IN POINT (B) WE HAVE CALCULATED FOR 6 MONTHS AS WE HAVE 6 MONTHS SALES AND LAST 6 MONTHS RECIEVABLES WHICH CAN BE SAID TO CORRECT AVERAGE COLLECTION PERIOD OF COMPANY.