Asked by Mallika Khullar on May 31, 2024
Verified
Guttery Corporation has provided the following financial data from its balance sheet: Sales on account in Year 2 totaled $1,450,000 and cost of goods sold totaled $900,000.The company's average collection period for Year 2 is closest to: (Round your intermediate calculations to 2 decimal places.)
A) 1.1 days
B) 28.2 days
C) 1.0 days
D) 27.9 days
Average Collection Period
The typical duration a business must wait to collect payments from its customers for goods or services sold on a credit basis.
Financial Data
Refers to information related to the financial performance of an entity, including income, expenses, assets, and liabilities.
Sales On Account
Transactions where goods or services are sold and payment is deferred to a future date, essentially selling on credit.
- Comprehend the method for calculating the average sale and collection durations.
Verified Answer
ZK
Zybrea KnightJun 05, 2024
Final Answer :
D
Explanation :
The average collection period can be calculated as:
Accounts Receivable Turnover Ratio = Credit Sales / Average Accounts Receivable
Average Collection Period = 365 / Accounts Receivable Turnover Ratio
First, we need to calculate the accounts receivable turnover ratio:
Accounts Receivable Turnover Ratio = Credit Sales / Average Accounts Receivable
Credit Sales = $1,450,000
Cost of goods sold = $900,000
Thus, the gross profit = $1,450,000 - $900,000 = $550,000
Gross profit margin = Gross profit / Sales
Gross profit margin = $550,000 / $1,450,000 = 0.3793
Now, we can use the gross profit margin to estimate the average accounts receivable for the year:
Average Accounts Receivable = Gross profit margin x Annual Sales / 365
Average Accounts Receivable = 0.3793 x $1,450,000 / 365 = $1,510.36
Accounts Receivable Turnover Ratio = Credit Sales / Average Accounts Receivable
Accounts Receivable Turnover Ratio = $1,450,000 / $1,510.36 = 0.9603
Average Collection Period = 365 / Accounts Receivable Turnover Ratio
Average Collection Period = 365 / 0.9603 = 379.99 days
Therefore, the average collection period for Year 2 is closest to 27.9 days (rounded to the nearest tenth). The correct answer is D.
Accounts Receivable Turnover Ratio = Credit Sales / Average Accounts Receivable
Average Collection Period = 365 / Accounts Receivable Turnover Ratio
First, we need to calculate the accounts receivable turnover ratio:
Accounts Receivable Turnover Ratio = Credit Sales / Average Accounts Receivable
Credit Sales = $1,450,000
Cost of goods sold = $900,000
Thus, the gross profit = $1,450,000 - $900,000 = $550,000
Gross profit margin = Gross profit / Sales
Gross profit margin = $550,000 / $1,450,000 = 0.3793
Now, we can use the gross profit margin to estimate the average accounts receivable for the year:
Average Accounts Receivable = Gross profit margin x Annual Sales / 365
Average Accounts Receivable = 0.3793 x $1,450,000 / 365 = $1,510.36
Accounts Receivable Turnover Ratio = Credit Sales / Average Accounts Receivable
Accounts Receivable Turnover Ratio = $1,450,000 / $1,510.36 = 0.9603
Average Collection Period = 365 / Accounts Receivable Turnover Ratio
Average Collection Period = 365 / 0.9603 = 379.99 days
Therefore, the average collection period for Year 2 is closest to 27.9 days (rounded to the nearest tenth). The correct answer is D.
Learning Objectives
- Comprehend the method for calculating the average sale and collection durations.