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

Sagar Traders has annual credit sales of Rs 14,40,000. Opening trade receivables were Rs 2,00,000 and closing trade receivables were Rs 2,80,000. Taking 360 days in a year, what is the average collection period?

The average collection period is 60 days. Average receivables are Rs 2,40,000, so receivables turnover is 14,40,000 divided by 2,40,000, which is 6 times. Dividing 360 days by 6 gives 60 days. Using only closing or opening balances would give a different, incorrect figure.

  1. A30 days
  2. B60 daysCorrect
  3. C48 days
  4. D84 days

Explanation

Average receivables = (2,00,000 + 2,80,000)/2 = 2,40,000. Receivables turnover = 14,40,000/2,40,000 = 6 times. Collection period = 360/6 = 60 days. Using closing receivables only gives 2,80,000/14,40,000 x 360 = 70 days, and using opening gives 50 days, so neither equals 60.

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