Multiple Choice
When is the direct write-off method for uncollectible accounts typically used?
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7. Receivables and Investments
Net Accounts Receivable: Direct Write-off Method
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Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
The formula to compute the receivables turnover ratio is net credit sales divided by:
A
Total assets
B
Gross accounts receivable
C
Average net accounts receivable
D
Net income
Verified step by step guidance1
Understand the receivables turnover ratio: It measures how efficiently a company collects its receivables during a given period. The formula is: Receivables Turnover Ratio = Net Credit Sales / Average Net Accounts Receivable.
Identify the numerator: Net Credit Sales refers to the revenue generated from credit sales after deducting any returns or allowances. Ensure you have this value from the financial statements.
Identify the denominator: Average Net Accounts Receivable is calculated by taking the sum of the beginning and ending net accounts receivable balances for the period and dividing by 2. This provides an average value for the accounts receivable over the period.
Set up the formula: Using MathML, the formula can be expressed as: . Plug in the values for Net Credit Sales and Average Net Accounts Receivable into the formula.
Interpret the result: Once calculated, the receivables turnover ratio indicates how many times the company collects its average receivables during the period. A higher ratio suggests efficient collection, while a lower ratio may indicate issues with receivables management.
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