Yonder Motors sells 20,000 automobiles per year for $25,000 each. The firm’s average receivables are $30,000,000 and average inventory is $40,000,000. Yonder’s average collection period is closest to which one of the following? Assume a 365-day year.

Answer (B) is correct. The average collection period, also called the days sales outstanding in receivables, is calculated as the number of days in the year over the receivables turnover ratio. Yonder’s can be thus calculated as follows: Average collection period = Days in year ÷ Accounts receivable turnover = 365 ÷ (Net credit sales ÷ Average net receivables) = 365 ÷ [(20,000 × $25,000) ÷ $30,000,000] = 365 ÷ ($500,000,000 ÷ $30,000,000) = 365 ÷ 16.667
= 21.9 days