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Ratios: Accounts Receivable (AR) Turnover quiz #1 Flashcards

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Ratios: Accounts Receivable (AR) Turnover quiz #1
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  • What does the accounts receivable turnover ratio measure in a company?
    The accounts receivable turnover ratio measures how efficiently a company extends credit and collects debts by comparing net credit sales to average accounts receivable.
  • How do you calculate the accounts receivable turnover ratio?
    Divide net credit sales by the average accounts receivable, where average accounts receivable is the sum of the beginning and ending balances divided by two.
  • If only one accounts receivable balance is provided, how is the accounts receivable turnover ratio calculated?
    If only one accounts receivable balance is given, use that number directly as the denominator instead of calculating an average.
  • Why is a higher accounts receivable turnover ratio generally considered better?
    A higher accounts receivable turnover ratio indicates more efficient credit management and faster collection of debts.
  • What could an abnormally high accounts receivable turnover ratio indicate about a company’s credit policies?
    An abnormally high ratio may suggest that the company’s credit terms are too strict, potentially deterring good customers who need more flexible credit.
  • Why is it important to compare a company’s accounts receivable turnover ratio to industry benchmarks?
    Comparing to industry benchmarks helps determine if the company’s ratio is favorable and appropriate for its specific business environment.
  • Given net sales of $500,000, a beginning accounts receivable balance of $75,000, and an ending balance of $25,000, what is the accounts receivable turnover ratio?
    The accounts receivable turnover ratio is 10, calculated as $500,000 divided by the average accounts receivable of $50,000.
  • What does an accounts receivable turnover ratio of 10 mean for a company?
    It means that for every dollar of credit extended, the company generates $10 in sales during the period.
  • What is the formula for calculating average accounts receivable?
    Average accounts receivable is calculated as (beginning balance + ending balance) divided by 2.
  • When calculating the accounts receivable turnover ratio, should cost of goods sold (COGS) be included in the calculation?
    No, COGS is not used in the accounts receivable turnover ratio; only net credit sales and average accounts receivable are relevant.
  • What is the formula for calculating the accounts receivable turnover ratio?
    The accounts receivable turnover ratio is calculated by dividing net credit sales by average accounts receivable. The formula is: Accounts Receivable Turnover = Net Credit Sales / Average Accounts Receivable, where average accounts receivable is (Beginning AR + Ending AR) / 2.
  • What does a high accounts receivable turnover ratio generally indicate about a company's credit management?
    A high accounts receivable turnover ratio generally indicates efficient credit management and faster collection of debts, meaning the company is effective at extending credit and collecting payments from customers.
  • How can an abnormally high accounts receivable turnover ratio be interpreted in terms of credit policy?
    An abnormally high accounts receivable turnover ratio may indicate that a company's credit terms are too strict, which could potentially alienate good customers who need more flexible credit conditions.
  • Why is it important to compare a company's accounts receivable turnover ratio to industry benchmarks?
    Comparing a company's accounts receivable turnover ratio to industry benchmarks is important because it helps assess whether the ratio is favorable, considering that credit practices and expectations vary across industries.