Question

What are some possible negative signals when the product of the accounts receivable turnover ratio is lower (i.e., fewer times)?

a) Lower liquidity and potential difficulty in collecting receivables.
b) Higher liquidity and efficient collection processes.
c) Increased profitability and strong financial health.
d) No impact on financial performance.

Answer 1

A lower accounts receivable turnover ratio suggests lower liquidity and potential difficulty in collecting receivables, not higher liquidity, increased profitability, or no impact as the other options incorrectly suggest.

Step-by-step explanation:

When analyzing a company's accounts receivable turnover ratio, understanding the implications of a lower ratio is crucial. A lower product of the accounts receivable turnover ratio, indicating fewer times the receivables are collected over a period, sends several negative signals. These include:

• Lower liquidity, meaning the company may not be as effective at converting receivables into cash.
• Potential difficulty in collecting receivables, which can signal that customers are taking longer to pay their invoices, potentially leading to cash flow problems.

Therefore, when the product of the accounts receivable turnover ratio is lower, the correct answer to the question is a) Lower liquidity and potential difficulty in collecting receivables. The other options are either not directly related to the turnover ratio or describe an opposite scenario from what a lower ratio indicates.