Question

Alex Ltd reported revenues of 1,592,000 in 2017 and 1,625,400 in 2016. Alex’s AR turnover ratio for 2017 was 4.92 and 3.52 in 2016.

Calculate Alex’s average collection period for accounts receivable for 2017 and 2016. Show your calculation, round to the nearest day.

Identify whether Alex’s AR turnover has improved or declined and explain 2 possible reasons, or policy decisions, that could have made by Alex to impact the company’s turnover ratio.

Answer 1

Solution:

Average collection period = Nos of days in a year / Accounts receivables turnover ratio

2017 = 365 / 4.92 = 74 days

2016 = 366 / 3.52 = 104 days

Ales's AR turnover is improved in 2017 as compared with 2016. The possible reasons for improving AR turnover are as under:

1. Alex ltd revised the credit terms to customer during 2017 and credit period was reduced for customer.

2. Alex ltd offered discount to customer for making early payments.

For above reasons / policy decision AR turnover ratio of alex ltd improved in 2017.