How is the trade receivables collection period calculated?

How is the trade receivables collection period calculated?

• A. Trade receivables / revenue * 365
• B. Revenue / trade receivables * 365
• C. Trade receivables / total assets * 365
• D. Net credit sales / trade receivables

Answer: (A)

The trade receivables collection period is calculated by taking the trade receivables and dividing them by revenue, then multiplying by 365 days. This formula effectively measures how long it takes, on average, for a company to collect cash from its customers after a sale. By using trade receivables in the numerator, the formula focuses on the amount of money owed to the company due to credit sales. When this figure is divided by total revenue, it provides an average collection period based on the company's level of sales activity. The multiplication by 365 transforms this ratio into a time period (days), making it easier to interpret for financial analysis. This calculation is vital for understanding a company's cash flow management and credit policies, helping analysts and managers identify how efficiently the company is collecting payments, which can impact overall liquidity and operational efficiency.

The trade receivables collection period is calculated by taking the trade receivables and dividing them by revenue, then multiplying by 365 days. This formula effectively measures how long it takes, on average, for a company to collect cash from its customers after a sale.

By using trade receivables in the numerator, the formula focuses on the amount of money owed to the company due to credit sales. When this figure is divided by total revenue, it provides an average collection period based on the company's level of sales activity. The multiplication by 365 transforms this ratio into a time period (days), making it easier to interpret for financial analysis.

This calculation is vital for understanding a company's cash flow management and credit policies, helping analysts and managers identify how efficiently the company is collecting payments, which can impact overall liquidity and operational efficiency.