Guttery Corporation has provided the following financial data from its balance sheet: Sales on account in Year 2 totaled $1,450,000 and cost of goods sold totaled $900,000. The company's average collection period (age of receivables) for Year 2 is closest to:
A)1.1 days
B)28.2 days
C)1.0 days
D)27.9 days

Question

Guttery Corporation has provided the following financial data from its balance sheet:  Sales on account in Year 2 totaled $1,450,000 and cost of goods sold totaled $900,000. The company's average collection period (age of receivables) for Year 2 is closest to:
A)1.1 days 
B)28.2 days 
C)1.0 days 
D)27.9 days

Quizplus · Accepted Answer

To calculate the average collection period, we need to know the company's accounts receivable turnover ratio.

Accounts receivable turnover ratio = Sales on account / Average accounts receivable

We are not given the average accounts receivable directly, but we can approximate it using the beginning and ending balances:

Average accounts receivable = (Beginning accounts receivable + Ending accounts receivable) / 2

Beginning accounts receivable is not given, but we can assume it is equal to the ending balance from the previous year.

Beginning accounts receivable = $350,000

Ending accounts receivable = $400,000

Average accounts receivable = ($350,000 + $400,000) / 2 = $375,000

Accounts receivable turnover ratio = $1,450,000 / $375,000 = 3.87

To calculate the average collection period, we need to divide 365 days by the turnover ratio:

Average collection period = 365 days / 3.87 = 94.38 days

Therefore, the closest answer choice is D) 27.9 days.

Guttery Corporation Has Provided the Following Financial Data from Its