Accounts receivable turnover ratio

Definition

Accounts receivable turnover ratio measures how efficiently a company collects its outstanding credit sales. It is calculated by dividing net credit sales by the average accounts receivable during a period.

5 Must Know Facts For Your Next Test

1. A higher accounts receivable turnover ratio indicates efficient collection of receivables.
2. The formula is Net Credit Sales / Average Accounts Receivable.
3. It helps in assessing the liquidity and operating efficiency of a business.
4. A low ratio may indicate problems with collecting payments from customers.
5. This ratio is typically analyzed over multiple periods to identify trends.

Review Questions

• What does a high accounts receivable turnover ratio signify?
• How do you calculate the accounts receivable turnover ratio?
• Why is it important to analyze the accounts receivable turnover ratio over multiple periods?

Related terms

Net Credit Sales:

Total sales on credit minus returns and allowances over a specific period.

Average Accounts Receivable:

The average amount of money owed to the company by its customers, calculated as (Beginning Accounts Receivable + Ending Accounts Receivable) / 2.

Liquidity Ratios:

Financial metrics used to determine a company's ability to pay off its short-term debts obligations.