The financial statements of the Pharoah Company report net sales of $372000 and accounts receivable of $56400 and $27600 at the beginning of the year and the end of the year, respectively. What is the average collection period for accounts receivable in days? (Use 365 days for calculation.) 41.2 81.7 31.0 51.3

the average collection period for accounts receivables is 41.2 days

Explanation:

Average Collection Period measures the amount of time it takes to collect credit from accounts owing.

Average Collection Period = Average Accounts Receivables / (Sales/365)

                                            =(($27600+ $56400)/2) / ( $372000/365)

                                            = $42,000/1019.178082

                                            = 41.20967742

                                            = 41.2 days

41.2 days

Explanation:

The average collection period for accounts receivable basically measures how long it takes in days to collect credit sales. Usually companies use sales terms like 2/10, n/30 which try to make clients pay faster, but it doesn't always work. There is no rule that states what collection is good and which one is bad (too long) but it generally depends on the sales policy and it is always better if the collection period is not longer than the normal credit term.

we need to calculate inventory turnover first:

inventory turnover = net sales / (average accounts receivable) = $372,000 / [($56,400 + $27,600) / 2] = $372,000 / $42,000 = 8.857

now we divide 365 days by 8.857 = 41.2 days

this means that it takes 41.2 days on average to collect an account receivable.