From the course: Corporate Financial Statement Analysis

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Compute and interpret average collection period (ACP)

Compute and interpret average collection period (ACP)

From the course: Corporate Financial Statement Analysis

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Compute and interpret average collection period (ACP)

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Okay, we've calculated how long our inventory is with us by calculating days, sales, and inventory. Turns out we can do the same thing with receivables. If we sell that inventory on credit, how long until we can expect to get the cash? Now we may have terms of net 30, but we can calculate how close to that net 30, for example, we are getting by calculating our average collection period. There are two steps in calculating average collection period, just like there was with inventory. The first thing we do is calculate our accounts receivable turnover. We start with our sales revenue this time. Remember with inventory, we looked at cost of goods sold. With accounts receivable, we're going to take our sales number, and we're going to divide that by our average accounts receivable. And to review, why do we do average accounts receivable? Well, remember, sales occur throughout the year, and we don't want to compare sales throughout the year with accounts receivable at the end or at the…

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