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
- A higher accounts receivable turnover ratio indicates efficient collection of receivables.
- The formula is Net Credit Sales / Average Accounts Receivable.
- It helps in assessing the liquidity and operating efficiency of a business.
- A low ratio may indicate problems with collecting payments from customers.
- 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?
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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.
