ACCA Performance Management (F5) Certification Practice Exam

Which metric indicates the effectiveness of collecting receivables?

1. Asset turnover

2. Payables payment period

3. Receivables collection period

4. Gross profit margin

The correct answer is: Receivables collection period

The metric that indicates the effectiveness of collecting receivables is the receivables collection period. This metric measures the average time taken for a company to collect payments from its customers after a sale has been made. A shorter receivables collection period indicates that a company is efficient at collecting its debts, resulting in better cash flow and liquidity. It reflects how well a company manages its credit policies and collection processes, providing insights into the operational efficiency related to the management of receivables. In contrast, the asset turnover ratio reflects how well a company utilizes its assets to generate revenue, rather than measuring the effectiveness of collecting receivables specifically. The payables payment period relates to the time it takes for a company to pay its suppliers, which doesn’t provide insight into revenue collection processes. The gross profit margin, on the other hand, indicates a company's profitability by showing the percentage of revenue that exceeds the cost of goods sold, but it does not inform about the efficiency of converting sales into cash through collections. Thus, the receivables collection period is the most relevant metric for evaluating the effectiveness of collecting receivables.