If the average collection period lengthens while annual sales are unchanged, what happens to the receivable balance?

If the average collection period lengthens while annual sales are unchanged, what happens to the receivable balance?

• A. The receivable balance decreases
• B. The receivable balance remains the same
• C. The receivable balance increases
• D. The receivable balance becomes zero

Answer: (C)

When the average collection period lengthens and annual sales stay the same, more of the year's sales are outstanding for a longer time. Since the receivable balance represents what customers owe at a given moment, a longer period before payment means more sales are unpaid at any point in time. Using the idea that average receivables ≈ daily credit sales × collection period, and daily credit sales = annual credit sales ÷ 365, a longer collection period with constant annual sales drives the average receivables upward. So the receivable balance increases. Choices like a decrease, no change, or dropping to zero would require faster collection or no outstanding amounts, which isn’t consistent with a longer collection period.

When the average collection period lengthens and annual sales stay the same, more of the year's sales are outstanding for a longer time. Since the receivable balance represents what customers owe at a given moment, a longer period before payment means more sales are unpaid at any point in time. Using the idea that average receivables ≈ daily credit sales × collection period, and daily credit sales = annual credit sales ÷ 365, a longer collection period with constant annual sales drives the average receivables upward. So the receivable balance increases.

Choices like a decrease, no change, or dropping to zero would require faster collection or no outstanding amounts, which isn’t consistent with a longer collection period.