Final answer:
The accounts receivable turnover ratio measures a company's efficiency in collecting its receivables, expressed by the formula Net Credit Sales divided by Average Accounts Receivable.
Step-by-step explanation:
The accounts receivable turnover ratio measures a company's effectiveness in collecting its receivables or money owed by customers.
The ratio helps to understand how well the company manages credit it extends to its customers and how quickly that short-term debt is converted into cash.
To calculate the accounts receivable turnover ratio, you would use the following formula:
Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable
Net Credit Sales refers to the total revenue a company generates on credit after deductions for returned merchandise and allowances. Average Accounts Receivable is calculated by adding the opening and closing balances of accounts receivable for a specific period, usually a year, and dividing by two.
For example, if a company has net credit sales of $100,000 and its average accounts receivable is $25,000, the accounts receivable turnover ratio would be:
Accounts Receivable Turnover Ratio = $100,000 / $25,000 = 4
This means the company collects its average receivables 4 times a year, or approximately every three months.