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Unformatted text preview: ents: (1) the time
from sale until the customer places the payment in the mail and (2) the time to
receive, process, and collect the payment once it has been mailed by the customer.
The formula for finding the average collection period is
Average collection period Accounts receivable
Average sales per day (14.10) Assuming receipt, processing, and collection time is constant, the average collection period tells the firm, on average, when its customers pay their accounts.
Knowing its average collection period enables the firm to determine whether
there is a general problem with accounts receivable. For example, a firm that has
credit terms of net 30 would expect its average collection period (minus receipt,
processing, and collection time) to equal about 30 days. If the actual collection
period is significantly greater than 30 days, the firm has reason to review its
credit operations. If the firm’s average collection period is increasing over time, it
has cause for concern about its accounts receivable management. A first step in
analyzing an accounts receivable problem is t...
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