Contemporary Media Sign Company sells on account. Recently, Contemporary reporte

Question

Contemporary Media Sign Company sells on account. Recently, Contemporary reported the following figures

2012:

Net Sales: 572,000

Receivables at the end of the year: 38,700

2011:

Net Sales: 600,000

Receivables at the end of the year: 46,100

1. Compute Contemporary's average collection period on receivables during 2012

2. Suppose Contemporary's normal credit terms for a sale on account are "2/10, net 30" How well does Contemporary's collection period compare to the company's credit terms? Is this good or bad for Contemporary?

Explanation / Answer

Hi,

Please find the answer as follows:

Part 1

Average Collection Period = 365/Accounts Receivable Turnover Ratio = 365/(572000/(38700 + 46100)/2 = 108.22 days

Part 2

The company's average collection period of high in comparison to the credit terms offered by it. By looking at the collection period it can be concluded that the company is not able to attract payments within the discount period (10 days). Further, the payments are getting collected even after the non discount period of 30 days. This situation is not good for the company.

Thanks.

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