Question

Accounts Receivable Turnover

All of the following statements are true for Garrison Company, who has an accounts receivable turnover rate of 10, except:

Select one:

a. Garrison writes off accounts receivables as uncollectible if they are more than 36.5 days old.

b. Garrison’s accounts receivable indicate greater liquidity than those of a business whose accounts receivable turnover rate is 4.

c. Garrison may have less liberal credit terms than a company with an accounts receivable turnover rate of 5.

d. Using a 365 day year, Garrison waits approximately 36.5 days to make collections of its credit sales.

Answer 1

HERE Answer a is false as sales turnover ration in no way means that receivable will be written of after average collection period which is 36.5 days for Garrison (Average collection period = 365/10 = 36.50 days).Average collection period only means that usually credit sales are collected within average period of 36.5 days actual collection period for different receivable may be different

b. is correct as Garrison’s accounts receivable indicate greater liquidity than those of a business whose accounts receivable turnover rate is 4 because company who has receivable turnover ratio means average collection period will be 91.25 (calculated as = 365/4=91.25 days) whereas Garrison has 36.5 days average collection period

c is also correct as Garrison allows on an average 36.5 days payment in comparison to those who has receivable trunover ratio who allows 73 days (calculated as = 365/5)

d. is correct Using a 365 day year, Garrison waits approximately 36.5 days to make collections of its credit sales. as average collection period = No.of days in a year/receivable turnover ratio = 365/10 =36.5 it shows that Garrison on average wait for 36.5 days for collection of receivable.

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