SOLUTION TO EXERCISE 8-6

  1. images

    images

  2. The average collection period of 29.41 days when compared to the typical 32 days between a sale date and the payment due date suggests that the company has adequate to strong controls surrounding its credit-granting activity.

    The average number of days to collect an account receivable is computed as follows:

    images

TIP: A ratio is an expression of the relationship of one item (or group of items) to a second item (or group of items). It is determined by dividing the first item (amount) by the second item (amount). The relationship may be expressed either as a percentage, a rate, or a simple proportion.

For example: If A is $100,000 and B is $25,000 the ratio of A to B can be expressed in several ways, such as the following:

A:B A/B
4:1 4.00
4 to 1 $4.00
4 times 400%

The way in which the ratio is expressed depends on the particular ratio. If it is the current ratio, it would likely be expressed as a proportion (4:1 or 4 to 1) or as a rate (4 times). If it is the debt to stockholders' equity ratio, it would likely be expressed as a percentage (400%).

TIP: In this chapter we look at the financial ratio used to assess the liquidity of receivables--the receivables ...

Get Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition now with the O’Reilly learning platform.

O’Reilly members experience books, live events, courses curated by job role, and more from O’Reilly and nearly 200 top publishers.