A firm normally has trade Receivables equal to two months' credit Sales. During the coming year it expects Credit Sales of Rs. 7,20,000 spread evenly over the year (12 months). What is the estimated amount of Trade Receivables at the end of the year?

A firm normally has trade Receivables equal to two months’ credit Sales. During the coming year it expects Credit Sales of Rs. 7,20,000 spread evenly over the year (12 months). What is the estimated amount of Trade Receivables at the end of the year?

SOLUTION

Debt collection period	12 Month / Debtors turnover ratio
2	12 / Debtors’ turnover ratio
Debtors’ turnover ratio	= 6

Debtors’ turnover ratio	Credit sales / Debtors (Closing )
6	7,20,000 / Debtors (Closing )
Debtors (Closing)	= 1,20,000