The Right Response is 2nd Reasoning.
A Short Average collection period.
A short average collection period suggests a tight credit policy and effective management of accounts receivable, which both allow the firm to meet its short-term obligations.
What does a shorter average collection period mean?
- A shorter average collection period (60 days or less) is generally preferable and means a business has higher liquidity.
- Average collection period is also used to calculate another liquidity measure, the receivables turnover ratio.
What is the average collection period for a company?
- An average collection period of 30 days for a company indicates that customers purchasing products or services on credit take around 30 days to clear pending accounts receivable.
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