Blodnick Corp. has found that its weighted average collection period has increased from 50 days last year to 55 days this year, and its average days of receivables this year is 48 compared to 52 last year. It is most likely that:
A. Blodhick has relaxed its credit standards this year.
B. Blodhick’s credit customers are paying more slowly this year.
C. Credit sales are a great part of Blodnick’s business this year.
The answer is B. The explaination is that “Outstanding accoutns are paying more slowly because the average collection period is up. Relaxed credit standards or a great reliance onc redit sales would tend to increase average days of receivables. The decrease in days of receivables suggest neither of them is likely”.
I am just confused between the term “weighted average collection period” and “average days of receivables”. To me, the first means how long it takes Blodnick to collect money while the second means how long it takes Blodnick’s custoemrs to pay. If it takes longer for the company to collet money and shorter for its customers to pay, why is the correct answer B^
Relaxing credit is usually indicative of a decrease in short-term liabilities because the firm would then be borrowing within the new higher credit alloted to them. (Ths is viewed from the firm’s perspective as the borrower, not the customers perspective)
The question mainly discusses how the firm manages its recievables. An increase of average days of recievables means it takes the firm longer to be paid, implying that credit customers pay more slowly.
I have the same question about telling the difference btw a weighted average collection period and an average days of receivables. The three options all look so fuzzy to me. And shouldn’t relaxed credit standards indicate a loose condition on trade credit for the firm’s buyers?
You wouldn’t be able to assess whether the company relaxed its credit standards unless you were given sales figures from the previous years or a profitability ratio. An increase in sales with an increase in receiveables turnover would indicate a relaxing of credit standards (Reading 28, Financial Analysis techniques, page 324).
Let’s look at these terms ’ wt avg collection period’ and ’ average days of receivables" - well conceptually they are both the same ie time spent in collecting money from customers. BUT, the first term is a wt avg… So, If this term gone from 50 to 55 while avg receivables r down then it’s definitely the bigger accounts that are delaying the payments as measured by wt avg. … So, it’s the weighted avg making the difference
Wt avg will be basis wts of money outstng n wud b higher fr bigger accounts gnrly