Q 8.31: The financial statements of Baker Company report net sales of $500,000 and accounts receivable of $10,000 and $15,000 at the beginning of the year and end of year, respectively. What is the average collection period for accounts receivable in days

The average collection period for accounts receivable in 9. 1 or 9 days

Explanation:

The average collection period for accounts receivable in days is computed as using the formula:

Average collection period for accounts receivable = 365 / Accounts Receivable Turnover Ratio

Computing Accounts Receivable Turnover Ratio as:

Accounts Receivable Turnover Ratio = Net Sales / Average Net Accounts Receivable

where

Net sales is $500,000

Average Net Accounts Receivable is as:

Average Net Accounts Receivable = Beginning Accounts Receivable + Ending Accounts Receivable / 2

= $10,000 + $15,000 / 2

= $25,000 / 2

= $12,500

Putting the values above:

= 500,000/12,500

Accounts Receivable Turnover Ratio = 40

Now, putting the values above in the formula of Average collection period of Accounts Receivable:

= 365 / 40

Average collection period of Accounts Receivable = 9.1 days or 9 days