Page 66 - DBP5043
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AVERAGE COLLECTION PERIOD:
Is the average number of days needed to collect cash from credit
sales. For example, a company sells its products on credit and
offer credit terms "3/10 net 45".
3/10 net 45 – 3% discount if payment is made within 10 days. All
payment should be settled in 45 days
Example:
From the records kept by the company, 50% of customers will take the
discount, that is payment made on the 10th day, 40% of customers will
pay on day 45 and the remainder paid on day 50. Therefore the
calculation of the average collection period is as below:
ANSWER:
The average collection period
= 0.5 (10 days) + 0.4 (45 days) + 0.1 (50 days)
= 28 days.
If the credit sales of the company is RM9,000,000 per annum
(assuming 360 days per year), then the average company's accounts
receivable can be measured by using the equation below:
ANSWER:
AAR = Average daily credit sales * Average collection period
= 9,000,000/360 * 2
= RM700,000
