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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A high accounts receivable (AR) turnover ratio indicates:
A
That the company is collecting its receivables quickly.
B
That the company is experiencing cash flow problems.
C
That the company is extending credit for longer periods.
D
That the company has a large amount of uncollected receivables.
Verified step by step guidance1
Understand the concept of accounts receivable (AR) turnover ratio: It measures how efficiently a company collects its receivables during a specific period. The formula is AR Turnover Ratio = \( \frac{Net \ Sales}{Average \ Accounts \ Receivable} \).
Interpret a high AR turnover ratio: A high ratio indicates that the company is collecting its receivables quickly, meaning customers are paying their debts promptly.
Analyze the implications of a high AR turnover ratio: It suggests strong cash flow management and efficient credit policies, as opposed to cash flow problems or extended credit periods.
Eliminate incorrect options: A high AR turnover ratio does not indicate cash flow problems, extended credit periods, or a large amount of uncollected receivables. These are typically associated with a low AR turnover ratio.
Conclude the correct answer: Based on the analysis, the correct interpretation of a high AR turnover ratio is that the company is collecting its receivables quickly.
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