Answer (A) is correct . An increase in discounts taken accompanied by declines in receivables balances and doubtful accounts all indicate that collections on the increased sales have been accelerated. Accordingly, the average collection period must have declined. The average collection period is a ratio calculated by dividing the number of days in a year (365) by the receivable turnover. Thus, the higher the turnover, the shorter the average collection period. The turnover increases when either sales (the numerator) increase, or receivables (the denominator) decrease. Accomplishing both higher sales and a lower receivables increases the turnover and results in a shorter collection period.
Answer (B) is incorrect because A decrease in the percentage discount offered provides no incentive for early payment.
Answer (C) is incorrect because Accounts receivable turnover (sales ¡Â average receivables) has increased.
Answer (D) is incorrect because No?information is given relative to working capital elements other than receivables. Both receivables and cash are elements of working capital, so an acceleration of customer payments will have no effect on working capital. |
