Question

Which one of the following statements is correct if a firm has a receivables turnover of 11? Assume 365-day year.

  

a. It takes the firm 11 days to collect payment from its customers.

   

b. The firm collects its credit sales in an average of 33.18 days.

   

c. It takes the firm 33.18 days to sell its inventory and collect the payment from the sale.

   

d. The firm collects its credit sales in an average of 36.5 days.

   

e. the firm has eleven times more in accounts receivable than it does in cash.

Answer 1

Accounts receivable trunover resembles the how the receipts of the credit sales made to customer is done. It is a ratio of credit sales to average accounts receivable, it denotes how well the accounts receivable is being received.

Further to calculate the average accounts receivable in days we devide the receivable turnover with the no of days of which we have to find the average. It does not means the days taken to sales rather it talks about collection.

Average accounts receivable turnover in days is the days which a firm takes to collect its credit sales from the customer.

In this case the average accounts receivable turnover in days = 365 days / Receivable trunover = 365 / 11 = 33.18 days.

Thus it takes the firm to collects its credit sales in an average of 33.18 days.

The correct option is -----B i.e it takes the firm to collects its credit sales in an average of 33.18 days.