Question

A company has 60,000 in sales per day and sells on credit terms of NET 30. Its current receivables booking practices record the invoices immediately on the day the sale occurs. The firm's average collection experiences indicate that its typical customer pays by check, and the remittance is received at the firm's central processing location 50 days after the invoicing of the sale. Given the efficiency of the central processing center customer accounts are credited on the following day (51). Because the company's customer base is geographically dispersed, the company doesn't have available funds until 5 days after the cash application at the central processing center.

What is the level of accounts receivable on the books for this company and on average, how much money does the firm have tied up in the collection system?

Answer 1

Sr.No.	Particulars	Amount
1)	Sales per day	60,000.00
2)	Days/year (assuming there is no holiday/off )	365.00
3)	Total Sales	21,900,000.00
4)	Average collection period (days)	50.00
5)	No. of cycles per year (2/4)	7.30
6)	Average clearing period in CPC (days)	51.00
7)	No. of cycles per year (2/6)	7.16
8)	The average level of accounts receivables in this company
9)	Since the customer accounts are credited by CPC on 51st day, cycle calculated using 51 days shall be used to estimate average level of accounts receivable (3/7)	3,060,000.00
10)	Average money that is tied up in collection system- one day is required to get payment cleared, so on any given day 1 day's collection will be tied up in clearing system -same as 1) above.	60,000.00