Question

Don's Cleaning & Restoration Services has a Receivables Turnover of 24.33X. The firm requires invoices to be paid within 10 days of sales and so are issued with "Net 10" credit terms. This information suggests which of the following is true? a) Don's has a problem with collecting on accounts receivables in a timely manner. b) Don's inventory sits on the shelf for about 24 days before being sold. c) Don'ts collects on his outstanding credit sales about every 15 days. d) Don's pays his outstanding bills about twice per month. e) Both A and C are true.

Answer 1

The correct answer is E) both a and c are true.

Explanation

Receivables turnover tells how effective the receivables are converted in money. For example on a sale 10,000 average account reveiables are 2000. Hence, receivables turnover ratio will be 10,000/2000 = 4. This means firm is able to convert those $10,000 sales in cash in 4 times after average receivable of 2000 are collected.

In order to find number of days a firm is able to convert its receivable in cash, divide 365 by Receivable Turnover ratio.

In the above question, Receivables turnover days = 365/24.33 = 15.0020 or 15days.

Option A) Don has a problem with collecting on accounts receivables timely manner.

The required days are 10 days. However, it takes 15 days to collect the receivables. Hence option a is correct.

Option B) Don's inventory sits on shelft for 24 days.

False. Receivables turnover ratio has nothing to do with inventory.

Option C) Don's collect on his credit sale about every 15 days.

True. We calculated the days above.

Option D) Don pays outstanding bills every two months.

False. again, receivables turnvoer ratio has nothing to do with outstanding bills.

Optio E) both A and C are true

This is the correction option. As both a and c are true