Question 5.

Where: Days = Total amount of days in period AR = Average amount of accounts receivables Credit Sales = Total amount of net credit sales during period Average account receivable collection period for Year 2009=

= 54 days Average account receivable collection period for Year 2010 =

= 62 days Average account receivable collection period for Year 2011 =

= 73 days Average account receivable collection period for Year 2012 =

= 82 days From the readings above it shows that the average account receivable collection period is getting longer from year 2009 to year 2012. Average account receivable collection period means the approximate amount of time that it takes for a business to receive payments owed, in terms of receivables, from its customers and clients. Increases in the collection period indicate an increasing time lag between credit sales and cash realization. For example,

average collection period of 82 days means it takes an average of 82 days for your customers to pay you for credit sales. Assuming A-Meds term of sale are standard for its industry, the average collection period-which tells if customer are paying bills on time can be a reflection on credit policy (a liberal policy, involving relaxed credit standards to generate higher sales volume, will usually result in a longer average collection period), on the diligence of a firms collection effort, on the attractiveness of discount offered for prompt payment or on general economic conditions as they affect the finances of the firms customers. Due to the size of transactions, most businesses allow customers to purchase goods or services via credit, but one of the problems with extending credit is not knowing when the customer will make cash payments. Therefore, possessing a lower average collection period is seen as optimal, because this means that it does not take a company very long to turn its receivables into cash. Ultimately, every business needs cash to pay off its own expenses (such as operating and administrative expenses). A longer collection period requires a higher investment in account receivables. A higher investment in account receivables means less cash is available to cover cash flow.