What is the average collection period ratio for a firm with $365,000 in annual revenues and current receivables of $6,600?

To calculate the average collection period ratio, you first need to determine the company's average daily sales. This is calculated by taking the annual revenues and dividing that by the number of days in a year (typically 365 days).

For a firm with $365,000 in annual revenues, the calculation for average daily sales would be:

Average Daily Sales = Annual Revenues / 365

Average Daily Sales = $365,000 / 365 = $1,000

Next, the average collection period can be found by dividing the current receivables by the average daily sales:

Average Collection Period = Current Receivables / Average Daily Sales

Average Collection Period = $6,600 / $1,000 = 6.6 days

This value means it takes the firm an average of 6.6 days to collect payment from its customers. This calculation effectively reflects how efficiently the company is managing its receivables. A shorter collection period indicates more efficient collections and cash flow, while a longer collection period might suggest issues in collecting payments.

Understanding this ratio is crucial for assessing a company’s liquidity and the effectiveness of its credit policies.