Asked by Emily Yannatone on Jul 26, 2024
Verified
Mojave Inc. has credit terms of 3/15, net 45. Based on experience, 67% of all customers will take the discount. Given this information, calculate average collection period.
A) 24.90 days
B) 25.00 days
C) 26.10 days
D) 27.20 days
E) 28.30 days
Average Collection Period
The average number of days that it takes for a business to receive payments owed by its customers, calculated by dividing the accounts receivable balance by the average daily sales.
Credit Terms
The conditions under which a seller will extend credit to a buyer, including the repayment period, discount for early payment, and the rate of interest if applicable.
Discount
A reduction applied to the usual cost of goods or services or the process of determining the present value of future cash flows.
- Master and apply the principle of the average collection period in the context of credit terms and discounts.
Verified Answer
MI
Mohanad IbrahimJul 27, 2024
Final Answer :
A
Explanation :
The average collection period can be calculated by taking into account the percentage of customers who take the discount and those who don't. For those who take the discount, the period is 15 days, and for those who don't, it's 45 days. Thus, the calculation is: (67% * 15 days) + (33% * 45 days) = 10.05 days + 14.85 days = 24.90 days.
Learning Objectives
- Master and apply the principle of the average collection period in the context of credit terms and discounts.