Discussion
When the Debt Turnover Ratio is 4, what is the average collection period ?
Answer: C
The average collection period is 3 months. With a debtors turnover ratio of 4, debtors are collected four times a year, so the collection period is the year divided by the turnover.
\[ \text{Period} = \frac{12}{4} = 3 \text{ months} \]A period of 5 months would need a turnover of 2.4, 4 months a turnover of 3, and 2 months a turnover of 6, so they do not fit the given ratio.
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