A client's credit sales for the year were £3,650,000 and its trade receivables at the year end were £450,000. Last year receivables collection was 30 days. Assuming a 365-day year, what is this year's collection period and what risk does it suggest?

Correct answer: A) 45 days; trade receivables may be overstated because of irrecoverable debts

Explanation

Receivables days = £450,000 / £3,650,000 x 365 = 45 days. The increase from 30 to 45 days suggests customers are paying more slowly, so some balances may not be recoverable and receivables could be overstated if no adequate allowance is made. A longer collection period does not suggest understatement.