Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition

SOLUTION TO EXERCISE 8-6

1. 

   

2. The average collection period of 29.41 days when compared to the typical 32 days between a sale date and the payment due date suggests that the company has adequate to strong controls surrounding its credit-granting activity.

   The average number of days to collect an account receivable is computed as follows:

   

TIP: A ratio is an expression of the relationship of one item (or group of items) to a second item (or group of items). It is determined by dividing the first item (amount) by the second item (amount). The relationship may be expressed either as a percentage, a rate, or a simple proportion.

For example: If A is $100,000 and B is $25,000 the ratio of A to B can be expressed in several ways, such as the following:

A:B	A/B
4:1	4.00
4 to 1	$4.00
4 times	400%

The way in which the ratio is expressed depends on the particular ratio. If it is the current ratio, it would likely be expressed as a proportion (4:1 or 4 to 1) or as a rate (4 times). If it is the debt to stockholders' equity ratio, it would likely be expressed as a percentage (400%).

TIP: In this chapter we look at the financial ratio used to assess the liquidity of receivables--the receivables ...