Multiple Choice
In analyzing liquidity and credit policies, what does a higher accounts receivable turnover ratio generally indicate?
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14. Financial Statement Analysis
Ratios: Accounts Receivable (AR) Turnover
Multiple Choice
Which ratio is used to measure how quickly credit sales are converted into cash?
A
Accounts Receivable Turnover Ratio
B
Debt-to-Equity Ratio
C
Inventory Turnover Ratio
D
Current Ratio
Verified step by step guidance1
Step 1: Understand the purpose of the question. The goal is to identify the ratio that measures how efficiently a company converts its credit sales into cash.
Step 2: Review the given options. Each ratio has a specific purpose: Accounts Receivable Turnover Ratio measures the efficiency of collecting receivables, Debt-to-Equity Ratio assesses financial leverage, Inventory Turnover Ratio evaluates inventory management, and Current Ratio measures short-term liquidity.
Step 3: Focus on the Accounts Receivable Turnover Ratio. This ratio is specifically designed to measure how quickly a company collects cash from its credit sales. It is calculated using the formula: .
Step 4: Eliminate the other options. Debt-to-Equity Ratio, Inventory Turnover Ratio, and Current Ratio do not directly relate to the conversion of credit sales into cash. They serve different financial analysis purposes.
Step 5: Conclude that the Accounts Receivable Turnover Ratio is the correct answer, as it directly measures the efficiency of converting credit sales into cash.
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