Using the information provided, what is the collection cycle for the firm?
Perfect Purchase Electronics
Selected Income Statement Items, 2014
Cash Sales $1,500,000
Credit Sales $7,500,000
Total Sales $9,000,000
COGS $6,000,000
Perfect Purchase Electronics
Selected Balance Sheet Accounts
12/31/2014 12/31/2013 Change
Accounts Receivable $270,000 $240,000 $30,000
Inventory $125,000 $100,000 $25,000
Accounts Payable $110,000 $90,000 $20,000
A) 6.84 days
B) 7.60 days
C) 10.34 days
D) 12.41 days
Answer: D
Explanation: D)
1. Average accounts receivable = (beginning AR + ending AR) /2
= ($270,000 + $240,000) /2
= $255,000.
2. Accounts receivable turnover = credit sales/ average AR
= $7,500,000/$255,000
= 29.41 times.
3. Collection cycle = 365 days/AR turnover
= 365 days/29.41
= 12.41 days.
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