ACCA Financial Management (F9) Certification Practice Exam

What does the accounts receivable payment period indicate?

1. The average time it takes for the company to collect cash from customers

2. The period until liabilities are settled

3. The time inventory is held before sale

4. The average time it takes to pay suppliers

The correct answer is: The average time it takes for the company to collect cash from customers

The accounts receivable payment period is a key metric that measures the average time a company takes to collect payments from its customers after a sale has been made. This measurement is critical for assessing a company's efficiency in managing its receivables and cash flow. When customers purchase on credit, the company records the transaction, but it doesn’t receive cash immediately. The accounts receivable payment period provides insight into how long customers typically take to fulfill their payment obligations. A shorter payment period indicates that the company has effective credit policies and is successful in collecting payments promptly, which is crucial for maintaining healthy cash flows and operation stability. In contrast, the other options pertain to different aspects of financial management. The period until liabilities are settled relates to accounts payable and demonstrates how long the company takes to pay its debts, and the time inventory is held before sale refers to inventory turnover, which measures efficiency in selling goods. The average time it takes to pay suppliers is also connected to accounts payable, showing how promptly a company meets its payment obligations to suppliers. However, these metrics do not provide information on the collection of cash from customers, which is specifically addressed by the accounts receivable payment period.