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Introduction to accounts receivable turnover.

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Introduction to accounts receivable turnover.
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Tejas Gaikwad
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Introduction to accounts receivable turnover. - August 7th, 2013

Receivable Turnover Ratio is one of the accounting activity ratios, a financial ratio.

This ratio measures the Sources:-
a) Receivables Turnover Ratio = Net receivable sales/ Average net receivables
b) Average Collection Period = 365 / Receivables Turnover Ratio
c)Average Debtor collection period: Trade Receivables/Credit Sales x 365 = Average collection period in days,
d)Average Creditor payment period: Trade Payable/Credit Purchases x 365 = Average Payment period in days.


There are many differences between industries: with the highest receivables turnover ratio there are industries such as Apparel Stores (52,3) and Luxury Goods (22,1) where customers usually pay in cash.With the lowest receivables turnover ratio there are industries such as Communication Equipment (5,4), Oil & Gas Equipment & Services (4,9), Infrastructure Operations (4,6) and Farm & Construction Equipment (3,9) that are not paid by customers in cash or within a short period of time.



Accounts receivable turnover forms a part of the ratio analysis of a firm. It is the ratio which quantifies the effectiveness of a firm’s policy with regards to credit extension and collection of debt. It measures the number of times, the credit is collected throughout an year.

Mathematically, it is expressed as:

Formula:

Accounts Receivable Turnover= (Net Credit Sales)/(Average Accounts Receivable)


A high value for the ratio implies that the firm follows a tight credit policy and manages its receivables efficiently while a low value implies that there are some collection problems and there is need for improvement.

Some firms may not have data about the credit sales and hence net sales is used which makes the ratio a bit deceiving depending on the proportion of cash sales.


Example 1:-

Assume,

Annual Credit Sales = Rs. 10,000

Accounts receivable at the beginning of the year = Rs. 1000

Accounts receivable at the end of the year = Rs. 3000

So,

Average Accounts receivable = (1000 + 3000)/2 = Rs. 2000

Accounts Receivable turnover = 10000/2000 = 5.


Example 2
:- Net credit sales of Company A during the year ended June 30, 2010 were $644,790. Its accounts receivable at July 1, 2009 and June 30, 2010 were $43,300 and $51,730 respectively. Calculate the receivables turnover ratio.
Solution :-
Average Accounts Receivable = ($43,300 + $51,730) ÷ 2 = $47,515
Receivables Turnover Ratio = $644,790 ÷ $47,515 ≈ 13.57


Example 3 :- Total sales of Company B during the year ended December 31, 2010 were $984,000. Customers returned goods invoiced at $31,400 during the year. Average accounts receivable during the period were $23,880. Calculate accounts receivable turnover ratio.
Solution :-
Net Credit Sales = $984,000 − $31,400 = $952,600
Receivables Turnover = $952,600 ÷ $23,880 = 39.89.
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Re: Introduction to accounts receivable turnover.
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Jitendra Mazee
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Re: Introduction to accounts receivable turnover. - April 18th, 2016

Quote:
Originally Posted by tejas.gaikwad.1044 View Post
Receivable Turnover Ratio is one of the accounting activity ratios, a financial ratio.

This ratio measures the Sources:-
a) Receivables Turnover Ratio = Net receivable sales/ Average net receivables
b) Average Collection Period = 365 / Receivables Turnover Ratio
c)Average Debtor collection period: Trade Receivables/Credit Sales x 365 = Average collection period in days,
d)Average Creditor payment period: Trade Payable/Credit Purchases x 365 = Average Payment period in days.


There are many differences between industries: with the highest receivables turnover ratio there are industries such as Apparel Stores (52,3) and Luxury Goods (22,1) where customers usually pay in cash.With the lowest receivables turnover ratio there are industries such as Communication Equipment (5,4), Oil & Gas Equipment & Services (4,9), Infrastructure Operations (4,6) and Farm & Construction Equipment (3,9) that are not paid by customers in cash or within a short period of time.



Accounts receivable turnover forms a part of the ratio analysis of a firm. It is the ratio which quantifies the effectiveness of a firm’s policy with regards to credit extension and collection of debt. It measures the number of times, the credit is collected throughout an year.

Mathematically, it is expressed as:

Formula:

Accounts Receivable Turnover= (Net Credit Sales)/(Average Accounts Receivable)


A high value for the ratio implies that the firm follows a tight credit policy and manages its receivables efficiently while a low value implies that there are some collection problems and there is need for improvement.

Some firms may not have data about the credit sales and hence net sales is used which makes the ratio a bit deceiving depending on the proportion of cash sales.


Example 1:-

Assume,

Annual Credit Sales = Rs. 10,000

Accounts receivable at the beginning of the year = Rs. 1000

Accounts receivable at the end of the year = Rs. 3000

So,

Average Accounts receivable = (1000 + 3000)/2 = Rs. 2000

Accounts Receivable turnover = 10000/2000 = 5.


Example 2
:- Net credit sales of Company A during the year ended June 30, 2010 were $644,790. Its accounts receivable at July 1, 2009 and June 30, 2010 were $43,300 and $51,730 respectively. Calculate the receivables turnover ratio.
Solution :-
Average Accounts Receivable = ($43,300 + $51,730) ÷ 2 = $47,515
Receivables Turnover Ratio = $644,790 ÷ $47,515 ≈ 13.57


Example 3 :- Total sales of Company B during the year ended December 31, 2010 were $984,000. Customers returned goods invoiced at $31,400 during the year. Average accounts receivable during the period were $23,880. Calculate accounts receivable turnover ratio.
Solution :-
Net Credit Sales = $984,000 − $31,400 = $952,600
Receivables Turnover = $952,600 ÷ $23,880 = 39.89.
Hey friend, thanks for sharing the information and i am sure it would help many people. BTW, i have also got a document where you would find more detailed information related to accounts receivable turnover.
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