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Average Collection Period 
Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority.)

In RATIO ANALYSIS of financial statements, the average number of days of credit sales represented by average total ACCOUNTS RECEIVABLE.  When compared to the term of sale on credit sales, it affords a test of current collectibility of the accounts receivable.

Calculation may be made directly as follows (assume annual credit sales of $7,200,000 on terms of "2/10,n/30" and average accounts receivable of $600,000):

Accts, receivable $600,000 x 360 - 360 days

Credit sales $7,200,000 

Thus, the average collection period in this case is in line with maximum credit terms; but since it is a dollar average, including accounts that take the cash discount by paying in 10 days, AGING OF RECEIVABLES would indicate dollar amounts of any accounts past due, and how long past due.


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