Accounts receivable turnover ratio measures how efficiently a company collects its outstanding credit sales. It is calculated by dividing net credit sales by the average accounts receivable during a period.
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A higher accounts receivable turnover ratio indicates efficient collection of receivables.
The formula is Net Credit Sales / Average Accounts Receivable.
It helps in assessing the liquidity and operating efficiency of a business.
A low ratio may indicate problems with collecting payments from customers.
This ratio is typically analyzed over multiple periods to identify trends.
Review Questions
What does a high accounts receivable turnover ratio signify?
How do you calculate the accounts receivable turnover ratio?
Why is it important to analyze the accounts receivable turnover ratio over multiple periods?
Related terms
Net Credit Sales: Total sales on credit minus returns and allowances over a specific period.
Average Accounts Receivable: The average amount of money owed to the company by its customers, calculated as (Beginning Accounts Receivable + Ending Accounts Receivable) / 2.
Liquidity Ratios: Financial metrics used to determine a company's ability to pay off its short-term debts obligations.
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