Question

Accounts receivable management An evaluation of the books of Blair Supply. B gives the end-ol year accounts recelvable balance, which is beleved to consist of mounts originating in the moniths indcated The copny had annual sales of $2.40 million The fim extends 30-day credit terms a. Use the year-end totall to evaluabe the fem's collection system b.If70% of the firm's sales occur between July and December would this affect the valdty of your conclusion in part a? Explain a.Theaverage colection period is□days Round to two decimal places) Since the average age of recelvables is about 16 days beyond the net date, utention should be directed to accounts receivable management b.lf70% ofthe firm's sales occur between July and December, wodd this afect the valony of your conclusion n pat a? (Select an Data Table (Cick on the icon located on the top-right corner of the data table below in order s copy its condents into a spreadsheet A. This may explain the lower turnover and higher average collection period B. The December accounts recelvable balance of 299 955 may not be a good measure of the average accounts receivable, thereby cau D C. The seasonality of sales also supgests the November figure (0-30 days overdue) is not a cause for great concen Month of Amounts recevable r July August more overdue and may be no 2 025 33.965 15 095 51,975 192 965 ®D. About 13% of all accounts receivable (those arising in July August and September) ae sixty days October November December Year-end accounts rec le

Answer 1

Part (a)

Annual sales = $ 2.40 mn = $ 2,400,000

Year end accounts receivables =$ 299,955

Average collection period = Year end accounts receivables / Annual sales x 365 = 299,955 / 2,400,000 x 365 = 45.62 days

Part (b)

If 70% of the sales occur between July to December then, this information affects my calculation of average collection period in part (a). This is because the formula used in part (a) assumes sales have occurred uniformly throughout the year.

Sales during July to December = 70% of annual sales = 70% x 2,400,000 =  $ 1,680,000

Receivables on account of sales during July to December = $ 299,955

Average collection period = 299,955 / 1,680,000 x 365 = 65.17 days

Even if we use this 65.17 days as a benchmark, there should have been no accounts receivables originating from the months upto September. Because all the sales upto September would have completed more than 65 days at the end of December and hence should have been collected fully. But in this question, we see receivables originating from the sales in the month of July till September also. Hence this is a point of concern. hence the correct answer is option (d).