Accounts Receivable AR Turnover Ratio Homework Help, Tutoring
Accounts Receivable AR Turnover Ratio Assignment Help, Tutor Help:
Accounts Receivable (AR) Turnover Ratio:
In case firm sells goods on credit, the realization of sales revenue is delayed
and the receivables are created. The cash is realized from these receivables later
on. The speed with which these receivables are collected affects the liquidity position
of the firm. The turnover ratios give the speed of conversion of receivables into
cash. The accounts receivable turnover ratio throws light on the collection and
credit policies of the firm. The ratio is also referred to as the Debtors Turnover
ratio. It is computed as:
Sales
Average Accounts Receivable
Average Accounts Receivable
The average accounts receivable is obtained by adding the beginning receivables
of the period and the ending receivables, and dividing the sum by two. The sales
figure in the numerator is only credit sales, because firm cash sales don’t give
any receivables. As the company’s profit and loss account does not distinguish between
credit and cash sales, total sales are considered for computing this ratio assuming
that a very negligible portion of total sales is for cash.
Higher the receivables turnover ratio, greater is the liquidity of the firm. However,
care should be taken to see that to project higher receivables turnover ratio, the
firm does follow a strict credit policy. This may have an impact on the overall
sales of the company. Turnover ratio gives, how many times on an average the receivables
are generated and collected during the year.
Example:
| Year 2009 | Year 2008 | ||
| Turnover | $2,654,900 | $2,086,450 | |
| Receivables | $ 769,879 | $ 567,632 |
Accounts receivable turnover ratio:
$2,654,900
($769,879 + $567,632) / 2
$2,654,900
$ 668,755
3.97 times
$2,654,900
($769,879 + $567,632) / 2
$2,654,900
$ 668,755
3.97 times
| Average Collection period = |
Average Debtors x 365 ( in days)
Credit Sales |
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