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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, opening debtors of ₹1,50,000 and closing debtors of ₹2,50,000. Taking 360 days in a year, what is the average collection period?

The average collection period is 60 days. Average debtors are ₹2,00,000, so debtors turnover is 12,00,000 divided by 2,00,000, which is 6 times. Dividing 360 days by 6 gives 60 days. Using closing debtors instead of the average would wrongly give 75 days.

  1. A60 daysCorrect
  2. B75 days
  3. C120 days
  4. D30 days

Explanation

Average debtors = (1,50,000 + 2,50,000) ÷ 2 = ₹2,00,000. Debtors turnover = 12,00,000 ÷ 2,00,000 = 6 times. Collection period = 360 ÷ 6 = 60 days. Using closing debtors gives 2,50,000 → 4.8 times → 75 days, which is wrong because average debtors should be used.

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