Multiple Choice
The accounts receivable turnover ratio measures:
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14. Financial Statement Analysis
Ratios: Accounts Receivable (AR) Turnover
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The accounts receivable turnover ratio is used to analyze:
A
the rate at which inventory is sold and replaced
B
how efficiently a company collects cash from its credit customers
C
the profitability of a company's sales
D
the company's ability to pay its short-term liabilities
Verified step by step guidance1
Understand the concept of the accounts receivable turnover ratio: This ratio measures how efficiently a company collects cash from its credit customers. It indicates the effectiveness of the company's credit policies and collection efforts.
Identify the formula for the accounts receivable turnover ratio: The formula is \( \text{Accounts Receivable Turnover Ratio} = \frac{\text{Net Credit Sales}}{\text{Average Accounts Receivable}} \).
Break down the components of the formula: Net Credit Sales refers to the revenue generated from credit sales after deducting returns and allowances. Average Accounts Receivable is calculated as \( \frac{\text{Beginning Accounts Receivable} + \text{Ending Accounts Receivable}}{2} \).
Analyze the result of the ratio: A higher turnover ratio indicates that the company is efficient in collecting receivables, while a lower ratio may suggest issues with collection or overly lenient credit policies.
Relate the ratio to the problem: The accounts receivable turnover ratio specifically analyzes how efficiently a company collects cash from its credit customers, not inventory turnover, profitability, or short-term liabilities.
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