Average Collection Period

The average collection period, used to appraise account receivable, is computed by dividing average daily sales into accounts receivable to find the number of days' sales tied up in receivable. In the case of Jimco in 1993, this ratio is given by:

Average collection period = Accounts receivable
Average sales per day
Average collection period = Accounts receivable
Average sales/365
$10,000,000 = 71.57 days
($51,000,000 / 365)

industry average = 32.21 days

The difficulty in calculating this ratio stems from the need to find annual purchases - a value not available in published financial statements. Ordinarily, purchase are estimated as a given percentage of cost of goods sold.

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Finance For Strategic Management
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