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CA Intermediate · Financial Management and Strategic Management · Financial Analysis and Planning - Ratio Analysis

Kaveri Traders has annual credit sales of ₹12,00,000, and opening and closing trade receivables of ₹1,80,000 and ₹2,20,000 respectively. Taking 360 days in a year, what is the average collection period?

The average collection period is 60 days. Average receivables are ₹2,00,000, so the receivables turnover on ₹12,00,000 credit sales is 6 times. Dividing 360 days by 6 gives 60 days. Using only closing receivables would wrongly give 66 days.

  1. A60 daysCorrect
  2. B66 days
  3. C54 days
  4. D72 days

Explanation

Average receivables = (1,80,000 + 2,20,000)/2 = ₹2,00,000. Receivables turnover = 12,00,000/2,00,000 = 6 times. Collection period = 360/6 = 60 days. Using closing receivables only gives 2,20,000/12,00,000 × 360 = 66 days, which ignores averaging.

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