Question

Use the following account information to find the average collection cycle for Rian Company.

2013 and 2014 Selected Balance Sheet Accounts of Rian Company

12/31/14   12/31/13   Change
Accounts receivable   $37,603   $45,244   $7,641
Inventory $55,553   $58,906   $3,353
Accounts payable $26,028   $24,291   $1,737

Cash sales $324,000
Credit sales $639,000
Total sales $963,000
Cost of goods sold   $561,181

What is the average collection cycle for Rian​ Company?   

? Days

  
  

Answer 1

For calculating the average collection cycle, we will first calculate the accounts receivable turnover. Then will calculate the average collection cycle.

.Accounts receivable turnover = Net Credit sales / Average accounts receivable

Net credit sales = $639000 (given)

Average accounts receivable = Beginning accounts receivable + Ending accounts receivable / 2

So, Average accounts receivable = Accounts receivable in 2013 + Accounts receivable in 2014 / 2

Average accounts receivable = ($37603 + $45244) / 2 = $41423.5

Now, putting these values in the accounts receivable turnover formula, we get,

Accounts receivable turnover = Net Credit sales / Average accounts receivable

Accounts receivable turnover = $639000 / $41423.5 = 15.43

Now, we will calculate the average collection cycle by the following formula:

Average collection cycle = 365 / Accounts receivable turnover

Average collection cycle = 365 / 15.43 = 23.66 days