What relationship exists between the average collection period and accounts receivable turnover?

Solution

The average collection period is a ratio that measures the average number of days it takes for a company to collect payment from its customers. It is calculated by dividing the average accounts receivable by average daily sales. Accounts receivable turnover, on the other hand, is a ratio that measures how quickly a company collects its receivables. It is calculated by dividing net credit sales by average accounts receivable. The relationship between these two ratios is inverse or opposite. When the average collection period increases, it means it takes the company more time to collect payment from its customers. Consequently, the accounts receivable turnover decreases because the company is collecting receivables at a slower rate.