average collection period

(noun)

365 divided by the receivables turnover ratio

Related Terms

Examples of average collection period in the following topics:

  • Using the Receivables Turnover Ratio

    • The receivables turnover ratio, also called the debtor's turnover ratio, is an accounting measure used to measure how effective a company is in extending credit as well as collecting debts.
    • A high ratio implies either that a company operates on a cash basis or that its extension of credit and collection of accounts receivable is efficient; in contrast, a low ratio implies the company is not making the timely collection of credit.
    • $\dfrac{\text{Trade receivables}}{\text{Credit sales} \cdot 365} = \text{Average collection period in days}$
    • Finally, the average creditor payment period can be calculated as follows:
    • $\dfrac{\text{Trade payables}}{\text{Credit purchases} \cdot 365} = \text{Average payment period in days}$

  • Average Cost Method

    • Under the Average Cost Method, It is assumed that the cost of inventory is based on the average cost of the goods available for sale during the period.
    • To see how a company uses the weighted-average method to determine inventory costs using periodic inventory procedure, look at.
    • Under the average cost method, it is assumed that the cost of inventory is based on the average cost of the goods available for sale during the period.
    • On 12/31/12, sales for the period were 50 units and ending inventory is 150 units.
    • Under periodic inventory procedure, a company determines the average cost at the end of the accounting period by dividing the total units purchased plus those in beginning inventory into total cost of goods available for sale.

  • Valuing Accounts Receivable

    • Before determining that an account balance is not collectible, a company generally makes several attempts to collect the debt from the customer.
    • Under the allowance method, an adjustment is made at the end of each accounting period to estimate bad debts based on the business activity from that accounting period.
    • Established companies rely on past experience to estimate unrealized bad debts, but new companies must rely on published industry averages until they have sufficient experience to make their own estimates.

  • Return on Assets

    • $\frac { Net\quad Income }{ Average\quad Value\quad of\quad Total\quad Assets\quad for\quad Accounting\quad Period } =\quad Return\quad on\quad Assets$
    • Return on total assets equals the total net income the business earns in a given accounting period divided by the average value of the business's total assets for the same period.
    • You calculate the average value of the total assets by adding the value of the business's total assets at the beginning of the period and the value of the business's total assets at the end of the period.
    • Return on Total Fixed Assets equals the business's net income divided by the average value of the business's total fixed assets for the accounting period.
    • You calculate the average value of the business's fixed assets by adding the value of the business's total fixed assets at the beginning of the accounting period to the value of the total fixed assets at the end of the period.

  • Costing Methods Overview

    • There are four accepted methods of costing items: specific identification; first-in, first-out; last-in, first-out; and weighted-average.
    • Cost accounting is regarded as the process of collecting, analyzing, summarizing, and evaluating various alternative courses of action involving costs and advising the management on the most appropriate course of action based on the cost efficiency and capability of the management.
    • The weighted-average method of inventory costing is a means of costing ending inventory using a weighted-average unit cost.
    • Companies most often use the weighted-average method to determine a cost for units that are basically the same, such as identical games in a toy store or identical electrical tools in a hardware store.

  • Asset Turnover Ratio

    • $Asset\quad Turnover\quad =\frac { Net\quad Sales\quad Revenue }{ Average\quad Total\quad Assets }$
    • The ratio is calculated by dividing the total sales for the accounting period by the average value of the assets the business owned during the year.
    • The average value is calculated by adding the value of assets the business owned at the beginning of the period to the value of the assets owned at the end of the period, and then dividing by two.
    • To calculate the fixed asset turnover ratio, divide the total sales for the accounting period by the average fixed asset balance for the accounting period.
    • The average fixed asset balance equals the beginning balance of fixed assets for the period plus the ending balance of fixed assets for the period, then dividing by two.

  • Impacts of Costing Methods on Financial Statements

    • The three main methods for inventory costing are First-in, First-Out (FIFO), Last-in, Last-Out (LIFO) and Average cost.
    • This method is the most easy to calculate; it takes a weighted average of all units available for sale during the accounting period and then uses that average cost to determine the value of COGS and ending inventory.
    • During periods of inflation, the FIFO gives a more accurate value for ending inventory on the balance sheet.
    • With average cost, the results fall in between FIFO and LIFO.
    • Differentiate between the FIFO, LIFO and Average Cost inventory valuation methods

  • Gross Profit Method

    • The gross profit method uses the previous year's average gross profit margin to calculate the value of the inventory.
    • A company will chose an inventory accounting system, either perpetual or periodic.
    • Periodic inventory is not updated on a regular basis.
    • Multiply sales made during the period by gross profit ratio to obtain estimated cost of goods sold.
    • The estimated cost of goods sold on the income statement for the period is $$1000\cdot.25 = $250$.

  • Cost Flow Assumptions

    • LIFO and weighted average cost flow assumptions may yield different end inventories and COGS in a perpetual inventory system than in a periodic inventory system due to the timing of the calculations.
    • In the perpetual system, some of the oldest units calculated in the periodic units-on-hand ending inventory may get expended during a near inventory exhausting individual sale.
    • In the LIFO system, the weighted average system, and the perpetual system, each sale moves the weighted average, so it is a moving weighted average for each sale.
    • In contrast, in the periodic system, it is only the weighted average of the cost of the beginning inventory, the sum cost of all the purchases, less than the cost of the inventory, divided by the sum of the beginning units and the total units purchased.

  • Impact of Inventory Method on Financial Statement Analysis

    • It's important to note that these methods will be affected by the system used to update inventory – "perpetual" or "periodic".
    • A perpetual system updates inventory every time a change in inventory occurs, and a periodic system updates inventory at the end of the accounting period.
    • Cost of goods sold is then beginning inventory plus purchases less the calculated cost of goods on hand at the end of the period.
    • The Average Cost method relies on average unit cost to calculate cost of goods sold and ending inventory.
    • Several variations on the calculation may be used, including weighted average and moving average.