7. Which of the following statements is correct? x) An extremely low average col

Question

7. Which of the following statements is correct? x) An extremely low average collection period will reduce the firm's exposure to a liquidity crises, but, it may (y) An e (z) suggest the firm's credit terms on accounts receivable are not sufficiently lenient xtremely low average collection period is desirable for firms because it maximizes the time that the firm waits to receive payments on its accounts receivable. An extremely high average collection period suggests that the firm is providing customers with too much time to make payments. A. (x), (y) and (z) B. (x) and (y) only C. (x) and (z) only D. (y) and (z) only E. (x) only Slate Roofing, Inc. has inventory of $464,234, accounts receivable of $238,400, current assets of 873.425 and current liabilities of $689,112. During the year, total sales are $1,585,160, of which S946,260 are cash sales. What is the average collection period for Slate Roofing? A. more than 146 days B. more than 138 days but less than 146 days C. more than 130 days but less than 138 days D. more than 122 days but less than 130 days E. less than 122 days 8.

Explanation / Answer

7. C - Both (X) and (Z) only

The average collection period is nothing but the average time taken by the company to realise its accounts receivable. It is an important metric which indicates the overall efficiency of the company in managing its receivables. Usually the lower the average collection period, the better the company scores. However extremely lower average collection period may discourage the potential customers as they may find the credit terms of the company unattractive. Similarly extremely high average collection period suggests that the company is allowing customers too much time to make payments and that would expose the firm to liquidity crisis.

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