Question

Analysts frequently use average collection period to assess the effectiveness of a company’s credit and collection policies. IF a company sells its goods on a 2/10, n30 basis, and its average collection period is 50 days, (1) should the accounts receivable manager get a bonus or a pink slip?

Answer 1

Solution:

Account Receivable Collection: Company’s average collection period is 50 days it means on an average company is getting his money after 50 days of sales.

Now company is introduced the cash discount policies for the customers. In this discount policy if the customer is paid within 10 days than customer will get the 2% cash discount on his account. This will attract to the our customer for early payments.

IF the customers are paid said goods on the basis of the 2/10 , n 30 that if the customer attract with discount than he can pay within 10 days or in maximum he can pay within 30 days of sale on credit. In both the cases overall collection period is reduced from 50 Days.

Overall collection period is reduced from this policy so account receivable manager will get the bonus from the company because this change will improve the collection of the company