Balance Sheets and Income statements

Question

Marble Construction has Accounts Receivable, Trade as follows on their balance sheets from 2004 and 2005:

2004: 185,411,000     2005: 258,402,000

Their Construction Revenue for those years, from their income statements was:

2004: 1,879,376,000   2005: 2,307,062,000

To the closest day, what is the collection period for the year 2005?

Answer 1

You will use two equations to find the average collection period.

Equation 1: Calculate the Average Receivable Turnover Ratio.

Accounts Receivable Turnover Ratio = Net Credit Sales / average Accounts Receivable

(To find average accounts receivable, add the two Accounts Receivable Numbers together and divide by two. So, for this problem, ($185,411,000 + $258,402,000) / 2 = $221,906,500, gives you the average Accounts Receivable.

Then, divide net credit sales by average accounts receivable, so:

$2,307,062,000/ $221,906,500 = 10.397

Equation 2: Calculate the Collection Period.

Collection Period = 365 / Accounts Receivable Turnover

So, for this problem, 365 / 10.397 = 35 days