The Investment in Receivables

The investment in accounts receivable for any firm depends on the amount of credit sales and the average collection period. For example, if a firm's average collection period, ACP, is 30 days, then at any given time, there will be 30 days' worth of sales

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

VII. Short-Term Financial Planning and Management

21. Credit and Inventory Management

© The McGraw-Hill Companies, 2002

CHAPTER 21 Credit and Inventory Management outstanding. If credit sales run $1,000 per day, the firm's accounts receivable will then be equal to 30 days X $1,000 per day = $30,000, on average.

As our example illustrates, a firm's receivables generally will be equal to its average daily sales multiplied by its average collection period, or ACP:

Accounts receivable = Average daily sales X ACP

Thus, a firm's investment in accounts receivable depends on factors that influence credit sales and collections.

We have seen the average collection period in various places, including Chapter 3 and Chapter 19. Recall that we use the terms days' sales in receivables, receivables period, and average collection period interchangeably to refer to the length of time it takes for the firm to collect on a sale.

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