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Ar turnover ratio equation9/23/2023 ![]() ![]() We can do so by dividing the number of days in a year by the receivables turnover ratio. Now we can use the Maria’s receivable turnover ratio to calculate its average collection period ratio which would reveal the average number of days the company takes to collect a credit sale. To analyze how efficient it has been in collecting its receivables during this period, the Maria can compare this ratio with its competing entities as well as with its own past years’ receivables turnover ratio. Maria Company’s receivables turnover ratio is 6 times for the year 2021 which means the company on average has collected its receivables 6 times during the year. Required: How may times on average the company collects its receivables? Hint: Compute receivables or debtors turnover ratio. The selected data about sales and receivables from the opening and closing balances of Maria Trading Company is provided below: Let’s exemplify the calculation of receivables turnover ratio. For the purpose of receivables turnover ratio, the students should bear in mind that opening and closing balances of receivables include the balances of both accounts receivable as well as the balances of all valid notes receivable that the entity holds at the beginning and end of the period. If the opening receivables’ balance is not given in the question, the closing balance of receivables should be used as denominator. In that case, the students should use the total sales number given in the question as the numerator of the equation, assuming that all the sales have been made on account.Īverage receivables in denominator part of the formula are equal to opening receivables balance plus closing receivables balance divided by two. The formula states that the numerator should include only credit sales however in examination problems, the examiners often don’t provide a separate breakdown of cash and credit sales. Two components of the formula of receivables turnover ratio are “net credit sales” and “average trade receivables”. The formula of receivables turnover ratio is given below: The commercial entities should determine their receivables turnover ratio from time to time because it is directly linked with the availability of cash, or its equivalent, which they can use to meet their day to day operating expenses as well as their short-term obligations. Like some other activity ratios, receivables turnover ratio is expressed in times like 5 times per quarter or 12 times per year etc. This ratio, together with average collection period ratio, indicates how quickly a business entity is able to convert its credit sales into cash and thus helps in evaluating the liquidity of receivables the business owns. ![]() It is computed by dividing the entity’s net credit sales by its average receivables for the period. Receivables turnover ratio (also known as debtors turnover ratio) is an activity ratio which measures how many times, on average, an entity collects its trade receivables during a selected period. ![]()
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