Question
Which ratio is commonly used to evaluate the
effectiveness of a company’s credit and collection policies?Solution
• The Average Collection Period (ACP) measures the average number of days it takes a firm to collect payments from its customers after a credit sale. • Formula: • ACP=Accounts Receivable / Net Credit Sales per day • A shorter ACP indicates efficient credit and collection policies (customers are paying on time). • A longer ACP suggests delays in collection, which can strain liquidity and increase the risk of bad debts. Other ratios: • Average Payment Period → evaluates how long a company takes to pay its creditors. • Current/Quick Ratios → assess liquidity. • Inventory Turnover Ratio → measures inventory efficiency.
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