Excerpts from Dowling Company's December 31, 2021 and 2020, financial statements and key ratios are presented below (all numbers are in millions): 2021 2020 Accounts receivable (net) $ 26 $ 19 Net sales $ 133 $ 118 Cost of goods sold $ 78 $ 73 Net income $ 26 $ 21 Inventory turnover 6.10 Return on assets 12.20 % Equity multiplier 2.54 Dowling's 2021 average collection period is: (Round your answer to 2 decimal places.) Multiple Choice 50.69 days. 54.33 days. 61.75 days. 52.59 days.

61.75 days

Explanation:

The average collection period (ACP) is basically the period of time taken for a business to recover its credit sales.

ACP= average account receivable/net sales X 365

Where,

The average accounts receivable (AAR) over the period can be determined by totaling the accounts receivable at the beginning of the period and the accounts receivable at the end of the period, then dividing by 2.

(All numbers are in millions)

AAR= 26+19/2

AAR=45/2

AAR=22.5

Average Collection Period for 2021

ACP=22.5/133 X 365

ACP=0.1691729323 x 365

ACP= 61.75 days

The shorter the number of days required to recover credit sales the better.

Average collection period is 61.75 days.                              

Explanation:

Average Collection Period : Average collection period shows the number of days that company is taken to convert its receivables in to cash.

Average Collection period = 365 / Accounts Receivable Turn over

Accounts Receivable Turn over = Net Credit Sales / Average Accounts Receivable

Given data

                                      2021      2020

                                  in Million     in Million

Accounts Receivable26           19

Net Sales                       133           118

Cost of goods sold        78            73

Net Income                  26             21

Accounts Receivable Turn over = 133 / [( 26+19)/2]

Accounts Receivable Turn over = 5.91 times

Average Collection period = 365 / Accounts Receivable Turn over ratio

Average Collection period for 2021 year = 365 / 5.91 =  61.75 days

This means that the company takes 61.75 days on average to convert its receivables in to cash.

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having a short history provide very little data for the lenders. they wouldn't be able to determine your credit behavior from such a small samples. even if they are perfect.

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