ACCA Performance Management (F5) Certification Practice Exam

What does the receivables collection period ratio measure?

1. Receivables / Total sales x 100

2. Receivables / Credit sales x 100

3. Receivables / Net sales x 100

4. Receivables / Average sales x 365

The correct answer is: Receivables / Credit sales x 100

The receivables collection period ratio is an important measure that helps assess how effectively a company is managing its credit sales and collections. It specifically focuses on the average time it takes for a company to collect cash from its credit sales. By expressing receivables in relation to credit sales, the calculation under this choice reflects the liquidity of a company’s receivables and indicates the time required to convert these receivables into cash. This ratio is critical for understanding cash flow, as longer collection periods may imply cash flow issues, whereas shorter periods generally point to effective credit management. In contrast, the other options do not accurately reflect the essence of the receivables collection period. For example, relating receivables to total sales or net sales includes cash sales, which can distort the understanding of how effectively receivables are being converted into cash. The most meaningful context for evaluating how quickly a firm can collect its receivables is through credit sales only, hence reinforcing the appropriateness of the selected answer.