Asked by Tmobile Oakland on Jun 18, 2024
Verified
Rawe Corporation's accounts receivable at the end of Year 2 was $329,000 and its accounts receivable at the end of Year 1 was $280,000.Sales, all on account, amounted to $1,350,000 in Year 2.The company's average collection period for Year 2 is closest to:
A) 1.2 days
B) 1.0 days
C) 82.4 days
D) 89.0 days
Average Collection Period
The average number of days it takes for a business to collect its accounts receivable.
Accounts Receivable
Money owed to a company by its customers for goods or services that have been delivered or used but not yet paid for.
Sales on Account
Transactions in which revenue is accounted for at the time of sale, but payment is deferred to a later date.
- Comprehend the strategies used in the analysis of accounts receivable, specifically focusing on the average collection period and turnover.
Verified Answer
JV
Joseph ValenzoJun 25, 2024
Final Answer :
C
Explanation :
To calculate the average collection period, we need to use the following formula:
Average Collection Period = (Accounts Receivable / Annual Credit Sales) x Number of Days
We can calculate the annual credit sales using the accounts receivable turnover ratio formula:
Accounts Receivable Turnover Ratio = Annual Credit Sales / Average Accounts Receivable
We can rearrange this formula to solve for annual credit sales:
Annual Credit Sales = Accounts Receivable Turnover Ratio x Average Accounts Receivable
For Year 2:
Accounts Receivable Turnover Ratio = Annual Credit Sales / Average Accounts Receivable
Accounts Receivable Turnover Ratio = $1,350,000 / (($329,000 + $280,000) / 2)
Accounts Receivable Turnover Ratio = 4.5
Annual Credit Sales for Year 2 = 4.5 x $304,500 ($304,500 is the average of Year 1 and Year 2 accounts receivable) = $1,370,250
Now we can calculate the average collection period:
Average Collection Period = (Accounts Receivable / Annual Credit Sales) x Number of Days
Average Collection Period = ($329,000 / $1,370,250) x 365
Average Collection Period = 87.9 days
Therefore, the closest answer is C) 82.4 days.
Average Collection Period = (Accounts Receivable / Annual Credit Sales) x Number of Days
We can calculate the annual credit sales using the accounts receivable turnover ratio formula:
Accounts Receivable Turnover Ratio = Annual Credit Sales / Average Accounts Receivable
We can rearrange this formula to solve for annual credit sales:
Annual Credit Sales = Accounts Receivable Turnover Ratio x Average Accounts Receivable
For Year 2:
Accounts Receivable Turnover Ratio = Annual Credit Sales / Average Accounts Receivable
Accounts Receivable Turnover Ratio = $1,350,000 / (($329,000 + $280,000) / 2)
Accounts Receivable Turnover Ratio = 4.5
Annual Credit Sales for Year 2 = 4.5 x $304,500 ($304,500 is the average of Year 1 and Year 2 accounts receivable) = $1,370,250
Now we can calculate the average collection period:
Average Collection Period = (Accounts Receivable / Annual Credit Sales) x Number of Days
Average Collection Period = ($329,000 / $1,370,250) x 365
Average Collection Period = 87.9 days
Therefore, the closest answer is C) 82.4 days.
Explanation :
Accounts receivable turnover = Sales on account ÷ Average accounts receivable*
= $1,350,000 ÷ $304,500 = 4.43 (rounded)
*Average accounts receivable =
($329,000 + $280,000)÷ 2 = $304,500
Average collection period = 365 days ÷ Accounts receivable turnover
= 365 days ÷ 4.43 = 82.4 days (rounded)
= $1,350,000 ÷ $304,500 = 4.43 (rounded)
*Average accounts receivable =
($329,000 + $280,000)÷ 2 = $304,500
Average collection period = 365 days ÷ Accounts receivable turnover
= 365 days ÷ 4.43 = 82.4 days (rounded)
Learning Objectives
- Comprehend the strategies used in the analysis of accounts receivable, specifically focusing on the average collection period and turnover.
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