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Average Collection Period
Source: Encyclopedia of Banking & Finance (9h Edition) by Charles
J Woelfel
(We recommend this as work of authority and you can order
it here)
In
RATIO ANALYSIS of financial statements, the average number of days of
credit sales represented by average total ACCOUNTS RECEIVABLE.
When compared to the term of sale on credit sales, it affords a
test of current collectibility of the accounts receivable.
Calculation
may be made directly as follows (assume annual credit sales of $7,200,000
on terms of “2/10,n/30” and
average accounts receivable of $600,000):
Accts,
receivable $600,000 x 360 – 360 days
Credit
sales $7,200,000
Thus,
the average collection period in this case is in line with maximum credit
terms; but since it is a dollar average, including accounts that take
the cash discount by paying in 10 days, AGING OF RECEIVABLES would indicate
dollar amounts of any accounts past due, and how long past due.
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