if the company's accounts receivable turnover is increasing, the average collection period:
What are your choices?
The average collection period is probably decreasing, as bills are paid off faster on the average.
(I am guessing)
Seeing your choices would help.
To determine the relationship between a company's accounts receivable turnover and the average collection period, follow these steps:
1. Understand the accounts receivable turnover ratio:
- The accounts receivable turnover ratio measures how quickly a company collects payment from its customers.
- It is calculated by dividing net credit sales by the average accounts receivable during a specific period.
2. Analyze the relationship between accounts receivable turnover and the average collection period:
- The accounts receivable turnover ratio is inversely related to the average collection period.
- A higher accounts receivable turnover means that the company is collecting payments more quickly.
- Therefore, a higher accounts receivable turnover indicates a shorter average collection period.
In conclusion, if the company's accounts receivable turnover is increasing, it suggests that the average collection period is decreasing, meaning the company is collecting payments from customers more quickly.
To determine the relationship between a company's accounts receivable turnover and its average collection period, we should first understand these terms.
Accounts Receivable Turnover:
Accounts receivable turnover is a financial metric used to measure how efficiently a company collects payment from its customers. It shows the number of times a company collects its average accounts receivable balance during a specific period, usually a year. A higher accounts receivable turnover indicates that the company is collecting payments more quickly.
Average Collection Period:
The average collection period, also known as the days sales outstanding (DSO), measures the average number of days it takes for a company to collect payment from its customers. It represents how long it typically takes for customers to pay their outstanding invoices. A lower average collection period means that the company is collecting payment more quickly.
Now, let's determine the relationship between accounts receivable turnover and the average collection period:
1. Accounts Receivable Turnover and Average Collection Period are Inversely Related:
These two metrics are inversely related, which means that as accounts receivable turnover increases, the average collection period decreases. When a company improves its efficiency in collecting payments, it takes less time to collect outstanding receivables, resulting in a shorter average collection period.
2. Calculation:
To directly calculate the average collection period based on the accounts receivable turnover, you can use the following formula:
Average Collection Period = 365 days / Accounts Receivable Turnover
For example, if a company has an accounts receivable turnover of 10, the average collection period would be:
Average Collection Period = 365 days / 10 = 36.5 days
In this case, as the accounts receivable turnover increases (e.g., from 5 to 10), the average collection period decreases (e.g., from 73 days to 36.5 days).
In conclusion, when a company's accounts receivable turnover increases, it indicates that the company is collecting payments more efficiently, resulting in a shorter average collection period.