O Level Accounting (7707)•7707/12/M/J/25
Explanation
Debtor collection period formula Steps:
- Calculate credit sales: total sales (4,000) = $18,000.
- Identify trade receivables: amount owed by customers = $9,600 (use closing balance for first year).
- Apply formula: trade receivables turnover in days = (trade receivables ÷ credit sales) × 365.
- Compute ratio and multiply: (18,000) × 365 = 18 days.
Why B is correct:
- The formula (trade receivables / credit sales) × 365 gives the average days to collect payments, yielding 18 days using year-end figures.
Why the others are wrong:
- A. Uses total sales ($22,000) instead of credit sales, understating days.
- C. May approximate with 360-day year or round ratio upward.
- D. Could stem from rough ratio estimate like 16.5 turns.
Final answer: B
Topic: Calculation and understanding of accounting ratios
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