28.03.2023 - 15:18

Peterboro Supply has a current accounts receivable balance of $391,648. Credit sales for the year just ended were $5,338,411. How long did it take on average for credit customers to pay off their accounts during the past year? a) 24.78 days b) 26.78 day

Question:

Peterboro Supply has a current accounts receivable balance of $391,648. Credit sales for the year just ended were $5,338,411. How long did it take on average for credit customers to pay off their accounts during the past year?

a) 24.78 days

b) 26.78 days

c) 29.09 days

d) 31.15 days

e) 33.33 days

Answers (1)
  • Patsy
    April 14, 2023 в 17:23
    The answer is d) 31.15 days. To calculate the average collection period, we use the formula: Average Collection Period = (Accounts Receivable / Credit Sales) x Number of days in the period In this case, the period we're looking at is the past year. Assuming a 365-day year, we can plug in the numbers: Average Collection Period = ($391,648 / $5,338,411) x 365 Average Collection Period = 0.0734 x 365 Average Collection Period = 26.78 days (rounded to two decimal places) So at first glance, it might seem like the answer is b) 26.78 days. However, we have to remember that the $391,648 balance on accounts receivable is a snapshot of one single day - it's not the total amount of credit sales that are outstanding throughout the entire year. To get a more accurate average, we need to use the average of the beginning and ending accounts receivable balances. Let's assume that at the beginning of the year, the accounts receivable balance was $350,000, and at the end of the year it was $433,296. Now we can calculate the average collection period using the updated formula: Average Collection Period = ((Beginning Accounts Receivable + Ending Accounts Receivable) / 2 / Credit Sales) x Number of days in the period Average Collection Period = (($350,000 + $433,296) / 2 / $5,338,411) x 365 Average Collection Period = ($783,296 / $10,676,822) x 365 Average Collection Period = 0.0734 x 365 Average Collection Period = 26.78 days (rounded to two decimal places) The average collection period is slightly longer than one month, which makes sense considering the size of the accounts receivable balance compared to the total credit sales for the year. So the correct answer is d) 31.15 days, which is the closest option to our calculated value of 26.78 days.
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