CA Intermediate · Financial Management and Strategic Management · Management of Receivables
Sharma Traders has annual credit sales of ₹36,00,000 and offers terms of 2/10, net 45. Customers representing 40% of sales take the discount and pay on day 10; the remaining 60% pay on day 45. Assume a 360-day year. What is the average collection period?
The average collection period is the weighted average of payment days: 40% of sales are collected in 10 days and 60% in 45 days, giving 4 + 27 = 31 days. A simple average of 10 and 45 would ignore the proportions of customers and is incorrect.
- A31.0 daysCorrect
- B27.5 days
- C25.0 days
- D35.0 days
Explanation
Average collection period = 0.40 × 10 + 0.60 × 45 = 4 + 27 = 31 days. Using a simple average of 10 and 45 (27.5 days) ignores the weights of the two customer groups and is wrong.
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