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

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.