Question

The accounts receivable turnover ratio measures the?

Answer 1

The accounts receivable turnover ratio measures how effectively a company collects its receivables. It is calculated by dividing the net credit sales by the average accounts receivable. A higher ratio indicates better credit management and faster collection times.

Step-by-step explanation:

The accounts receivable turnover ratio is a measure within business finance that indicates how effectively a company collects on the credit it extends to customers. This ratio is calculated by dividing the net credit sales by the average accounts receivable during a given period. A higher ratio suggests that a company is more efficient at collecting its receivables, meaning its customers are paying their debts quickly.

To calculate this ratio, you would typically follow these steps:

1. Determine the total net credit sales for the period in question.
2. Calculate the average accounts receivable by adding the beginning and ending accounts receivable and then dividing by two.
3. Divide the net credit sales by the average accounts receivable to arrive at the accounts receivable turnover ratio.

For example, if a company had net credit sales of $100,000 and an average accounts receivable of $25,000, their accounts receivable turnover ratio would be 4. This signifies that the company collects its average receivables 4 times a year, which indicates good credit management performance.