Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

14. Financial Statement Analysis

Ratios: Accounts Receivable (AR) Turnover

Financial Accounting

14. Financial Statement Analysis

Ratios: Accounts Receivable (AR) Turnover

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Multiple Choice

The accounts receivable turnover ratio measures:

How efficiently a company collects cash from its credit customers.

The average time it takes to sell inventory.

The proportion of net income to total assets.

The percentage of sales made on credit.

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Verified step by step guidance

Understand the concept of the accounts receivable turnover ratio: It measures how efficiently a company collects cash from its credit customers. This ratio is important for assessing the effectiveness of a company's credit and collection policies.

Identify the formula for the accounts receivable turnover ratio: \( \text{Accounts Receivable Turnover Ratio} = \frac{\text{Net Credit Sales}}{\text{Average Accounts Receivable}} \). This formula helps calculate how many times the company collects its average accounts receivable during a specific period.

Recognize the purpose of the ratio: It evaluates the efficiency of a company in converting its accounts receivable into cash. A higher ratio indicates faster collection of receivables, which is generally favorable for cash flow management.

Differentiate the accounts receivable turnover ratio from other metrics: For example, it does not measure the average time to sell inventory (inventory turnover ratio), the proportion of net income to total assets (return on assets), or the percentage of sales made on credit (credit sales percentage).

Conclude that the correct interpretation of the accounts receivable turnover ratio is: 'How efficiently a company collects cash from its credit customers.' This aligns with the formula and the purpose of the ratio.