Munson Auto Parts Inc is a retailer of auto parts and supplies. They often deliver auto parts to various mechanic shops around town allowing the shops to pay for the parts delivered within 45 days. Recently, Munson's accountant has computed that the
accounts receivable turnover ratio is "7". Assuming the company is open 365 days a year, is the company receiving payment from its customers in a timely enough fashion? Explain.
The accounts receivable turnover ratio measures, on average, how many times a year accounts receivable balances turn over or are paid off. In Munson's case, receivables are paid off in full an average of 7 times per year. Converting this information into days sales in receivables shows that, on average, Munson's customers take 52 days to pay on their account (365/7).
Therefore, on average, the company is not receiving payments from its customers in a timely enough fashion.
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