Total current assets (CA) $20,000
Accounts receivable (AR) $10,000
Current liabilities (CL) $11,000
Inventory (INV) $4,000
Net sales $30,000
Total assets $25,000
Net income $5,000
Calculate average day’s collection.
A. 12 days C. 1.2 years
B. 120 days D. 12 years
B.120 days is my answer
To calculate the average day's collection, you need to follow the following steps:
Step 1: Determine the average accounts receivable (AR) balance.
To calculate the average AR balance, you add the beginning and ending AR balance and divide it by 2.
Average AR Balance = (Beginning AR Balance + Ending AR Balance) / 2
In this case, the beginning AR balance is $10,000 and the ending AR balance is also $10,000.
Average AR Balance = ($10,000 + $10,000) / 2 = $20,000 / 2 = $10,000
Step 2: Calculate the average day's collection.
To calculate the average day's collection, divide the average AR balance by the net sales and then multiply it by the number of days in a year.
Average Day's Collection = (Average AR Balance / Net Sales) x Days in a Year
In this case, the net sales is $30,000, and we'll assume the number of days in a year is 365.
Average Day's Collection = ($10,000 / $30,000) x 365 = 0.3333333333 x 365 = 120.833333333
The average day's collection is approximately 120.83 days. Therefore, your answer B. 120 days is correct.