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CA Intermediate · Financial Management and Strategic Management · Management of Receivables

Kapoor Ltd currently has credit sales of Rs 24,00,000 a year, with a 360-day year. It offers terms of net 60 days and customers pay on average in 60 days. It proposes a discount of 2/10, net 60. It expects 50% of sales to be paid on day 10 (taking the discount) and the rest on day 60. Sales stay unchanged. Ignoring bad debts and other costs, what will be the average collection period after the change?

The average collection period becomes 35 days. Half of sales are collected on day 10 and half on day 60, so the weighted average is 0.5 x 10 plus 0.5 x 60, which equals 5 plus 30, or 35 days.

  1. A35 daysCorrect
  2. B30 days
  3. C40 days
  4. D50 days

Explanation

Average collection period = 0.5 x 10 + 0.5 x 60 = 5 + 30 = 35 days. Check: receivables = 12,00,000 sales on day 10 gives 12,00,000/360 x 10 and the other half gives 12,00,000/360 x 60; total days weighted equals 35. Using 30 days wrongly ignores the 10-day weight, and 40 uses wrong weights.

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