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Finance Concepts: Average Collection Period

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Finance Concepts: Average Collection Period

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Questions and Answers

What does the average collection period indicate?

Number of employees in the business

Efficiency of debt collection (correct)

Amount of inventory in the business

Profit margin of the business

Why is it important for a business to collect debts on time?

To increase debt levels

To decrease net sales

To reduce credit sales

To improve liquidity (correct)

What is the formula for calculating the average collection period?

Accounts receivable / Net credit sales x 365 days (correct)

Accounts Receivable x 365 days

Net Credit Sales / 365 days x Accounts receivable

Net Credit Sales / Accounts Receivable

What does the average collection period ratio measure?

Average number of days it takes a company to collect on its accounts receivable Signup and view all the answers

A company with a lower average collection period ratio indicates what?

Efficient cash flow management Signup and view all the answers

What are the implications of a high average collection period ratio?

Signals cash flow issues and inefficiencies in credit policies Signup and view all the answers

What does a decreasing average collection period ratio indicate?

Positive efficiency in managing accounts receivable Signup and view all the answers

Why is the average collection period ratio important for businesses?

The average collection period ratio is important for businesses as it provides insights into the efficiency of accounts receivable management and cash flow Signup and view all the answers

What is the interpretation of an average collection period of 72.67 days?

The business collects money in 73 days Signup and view all the answers

What is the average collection period ratio for Zizz Company if the Accounts receivable is RM40,000, Net credit sales is RM185,000 and the number of days in a year is 365 days?

79 days Signup and view all the answers