80% of sales of 10,00,000 of a firm are on credit. It has a receivable turnover of 8. What is the average collection period (360 days a year) and average debtors of the firm?

45 days and 1,00,000

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360 days and 1,00,000

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45 days and 8,00,000

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360 days and 1,25,000

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Solution

The correct option is A 45 days and 1,00,000
Debtors turnover ratios is an activity ratio measuring how efficiently a firm uses it assets. This can be calculated as:
Debtors Turnover Ratio=Credit sales/Average accounts receivables

In the given information:
Total Sales Rs.1000000
Credit Sales Rs.800000 (80% of sales)
Debtors T/O ratio- 8
Therefore
8=800000/Average receivables
Average Receivables are Rs.100000

Average Collection period=No of days in a year/debtors turnover ratio
=360/8
Average collection period is 45 days.

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