The average collection period is computed by dividing
A) net credit sales by average gross accounts receivable.
B) net credit sales by ending gross accounts receivable.
C) the accounts receivable turnover ratio by 365 days.
D) 365 days by the accounts receivable turnover ratio.

Question

Quizplus · Accepted Answer

The average collection period is the average number of days it takes for a company to collect payment from its customers. It can be computed by dividing 365 days by the accounts receivable turnover ratio. This gives the average number of days it takes for a company to collect payment on its accounts receivable. Option A is incorrect as it does not compute the average collection period. Option B is incorrect as it uses only the ending balances of accounts receivable, rather than an average. Option C is also incorrect as it only calculates the turnover ratio, which needs to be divided into 365 days to obtain the average collection period.

The Average Collection Period Is Computed by Dividing