A construction company maintains a 45-day average collection period for receivables. If annual credit sales are $2,400,000, what is the average accounts receivable balance?
Correct Answer
B) $296,000
Average receivables = (Annual credit sales ÷ 365 days) × Average collection period. ($2,400,000 ÷ 365) × 45 = $6,575 × 45 = $295,890, approximately $296,000.
Why This Is the Correct Answer
The correct answer uses the standard accounts receivable turnover formula to find average receivables. By dividing annual credit sales by 365 days, we get the daily sales rate of $6,575. Multiplying this by the 45-day collection period gives us the average amount of money tied up in receivables at any given time. This calculation shows approximately $296,000 is the average accounts receivable balance.
Why the Other Options Are Wrong
Option A: $315,000
This answer of $315,000 is too high and likely results from using 360 days instead of 365 days in the calculation, or from rounding errors in the intermediate steps.
Option D: $345,000
This answer of $384,000 is the highest option and appears to result from using 360 days and making additional calculation errors, or possibly confusing this with a different financial ratio calculation.
Memory Technique
Remember 'SODA': Sales ÷ Days × Average collection period = Average receivables. Think of it as how much sales 'fizz' you have tied up in receivables.
Reference Hint
Look up 'Accounts Receivable Management' or 'Financial Analysis' in your business management or accounting reference materials, typically found in chapters covering working capital management.
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