Asked by Daynellie Kendall on Jun 06, 2024
Verified
The Dawson Brothers have a 60 day collection period. Sales for the next calendar year are estimated at $1,800, $1,300, $2,200 and $2,000, respectively, by quarter starting with the first quarter of the year. Given this information, which one of the following statements is correct? Assume a year has 360 days.
A) The firm will collect $1,200 in Quarter 2.
B) The accounts receivable balance at the beginning of Quarter 4 will be $1,466.67.
C) The firm will collect $866.67 from Quarter 3 sales in Quarter 4.
D) The firm will have an accounts receivable balance of $666.67 at the end of the year.
E) The firm will collect a total of $1,666.67 in Quarter 4.
Collection Period
A financial metric that indicates the average number of days it takes a company to collect payments from its credit sales, essentially a detailed aspect of collection time with focus on receivables.
Accounts Receivable Balance
The accounts receivable balance is the total amount owed to a company by its customers for goods or services delivered on credit but not yet paid for.
Calendar Year
A one-year period that begins on January 1 and ends on December 31, used for general purposes including statutory reporting and personal timekeeping.
- Assess the duration of the collection period and its influence on cash liquidity.
Verified Answer
GB
George BoldingJun 11, 2024
Final Answer :
B
Explanation :
The accounts receivable balance at the beginning of Quarter 4 can be calculated by considering the sales that occurred 60 days prior. Since a year has 360 days and each quarter has 90 days, the sales from the last 60 days of Quarter 3 will be collected in Quarter 4. The sales in Quarter 3 are $2,200, and since the collection period is 60 days, two-thirds of Quarter 3's sales will be collected in Quarter 4, which is $2,200 * (60/90) = $1,466.67.
Learning Objectives
- Assess the duration of the collection period and its influence on cash liquidity.