30 days

Therefore, on average, Prufrock collects on its credit sales in 30 days. For obvious reasons, this ratio is very frequently called the average collection period (ACP).

Also note that if we are using the most recent figures, we could also say that we have 30 days' worth of sales currently uncollected. We will learn more about this subject when we study credit policy in a later chapter.

Payables Turnover

Here is a variation on the receivables collection period. How long, on average, does it take for Prufrock Corporation to pay its bills? To answer, we need to calculate the accounts payable turnover rate using cost of goods sold. We will assume that Prufrock purchases everything on credit.

The cost of goods sold is $1,344, and accounts payable are $344. The turnover is therefore $1,344/$344 = 3.9 times. So payables turned over about every 365/3.9 = 94 days. On average, then, Prufrock takes 94 days to pay. As a potential creditor, we might take note of this fact.

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