Multiple Choice
ABC Company had \$200,000 in Net Sales and Gross Profit of \$80,000. If AR had a balance of \$16,000, what is the AR Turnover ratio?
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14. Financial Statement Analysis
Ratios: Accounts Receivable (AR) Turnover
Multiple Choice
Which of the following statements about the accounts receivable turnover ratio is true?
A
A high accounts receivable turnover ratio always means the company has poor credit policies.
B
A lower accounts receivable turnover ratio generally indicates that a company is collecting receivables more quickly.
C
The accounts receivable turnover ratio measures how many times a company collects its average accounts receivable during a period.
D
The accounts receivable turnover ratio is calculated as net credit sales divided by total assets.
Verified step by step guidance1
Step 1: Understand the concept of the accounts receivable turnover ratio. This ratio measures how efficiently a company collects its receivables or how many times, on average, the company collects its average accounts receivable during a specific period.
Step 2: Clarify the formula for the accounts receivable turnover ratio. The correct formula is: . It is not calculated as net credit sales divided by total assets, as stated in one of the options.
Step 3: Analyze the implications of a high accounts receivable turnover ratio. A high ratio typically indicates that the company is collecting receivables efficiently, not necessarily that it has poor credit policies. Poor credit policies would depend on other factors, such as customer satisfaction or bad debt levels.
Step 4: Evaluate the implications of a low accounts receivable turnover ratio. A lower ratio generally indicates slower collection of receivables, which could suggest inefficiencies in the collection process or lenient credit policies.
Step 5: Identify the correct statement. Based on the explanation, the correct statement is: 'The accounts receivable turnover ratio measures how many times a company collects its average accounts receivable during a period.' This aligns with the definition and purpose of the ratio.
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