Acca financial Accounting (FA) Study Text ac ca (FA)

Interpretation of financial statements 

390

 

KAPLAN PUBLISHING

 

Receivables collection period 

This is normally expressed as a number of days: 

Trade receivables

Credit sales

 × 365 = X days

 

The ratio shows, on average, how long it takes to collect cash from customers 

following the sale of goods on credit. The collection period should be compared 

with: 

•

 

the stated credit policy 

•

 previous 

period 

figures 

•

 

industry average or competitor. 

Increasing accounts receivables collection period is usually a bad sign 

suggesting lack of proper credit control which may lead to irrecoverable debts. 

It may, however, be due to: 

•

 

a deliberate policy to attract more trade, or 

•

 

a major new customer being allowed different terms. 

Falling receivables days is usually a good sign, though it could indicate that the 

entity is suffering a cash shortage.