A general contractor has accounts receivable of $125,000 and wants to maintain a collection period of 30 days. If the contractor's annual revenue is $1,500,000, what is the current collection period?
Correct Answer
A) 31 days
Collection period = (Accounts Receivable ÷ Annual Revenue) × 365 days. ($125,000 ÷ $1,500,000) × 365 = 30.42 days, which rounds to 31 days.
Why This Is the Correct Answer
The collection period formula is (Accounts Receivable ÷ Annual Revenue) × 365 days. Substituting the given values: ($125,000 ÷ $1,500,000) × 365 = 0.0833 × 365 = 30.42 days. When rounded to the nearest whole day, this equals 31 days. This metric tells the contractor how long it takes on average to collect payment from customers.
Why the Other Options Are Wrong
Option C: 35 days
25 days is too low and would result from an incorrect calculation or using the wrong formula components.
Option D: 25 days
30 days is the target collection period the contractor wants to maintain, not the current actual collection period based on the financial data provided.
Memory Technique
Remember 'ARA 365' - Accounts Receivable over Annual revenue times 365 days. Think of it as 'How many days of sales are sitting in receivables?'
Reference Hint
Look up 'Financial Analysis' or 'Accounts Receivable Management' in business management chapters, typically found in contractor business practices sections.
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