Question

If a firm has $100,000 in credit sales and $20,000 in accounts receivables, what will happen to average days collections if accounts receivable increases?

Average days collections will stay the same

Cannot tell with the information provided

Average days collections will decrease.

Average days collections will increase

Answer 1

Days collection is computed as follows:

= (Accounts receivable / credit sales) x 365

= ($ 20,000 / $ 100,000) x 365

= 73 days

As can be seen if the accounts receivable increases, the days collection will get increased since in the equation above, the increase in the accounts receivable will lead to increase in the numerator and as a result days collection will get increased.

Hence the correct answer is option of Average days collections will increase

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