Final answer:
If the percentage increase in accounts receivable is greater than that of sales, the accounts receivable turnover ratio will likely decrease, indicating potential issues with collection effectiveness and cash flow.
Step-by-step explanation:
If the percentage increase in accounts receivable (A/R) is greater than the percentage increase in sales, this typically indicates that a company's customers are taking longer to pay their invoices. As a result, the accounts receivable turnover ratio—a measure of how efficiently a company collects cash from its credit sales—will likely decrease.
This is because the A/R turnover ratio is calculated as sales divided by average accounts receivable, and if sales (the numerator) increase by a smaller percentage than accounts receivable (the denominator), the ratio itself will reduce.
Collection effectiveness and cash flow may also be negatively impacted, since more sales are being made on credit rather than being paid for in cash, potentially leading to liquidity problems if the trend continues. Monitoring this situation is crucial for assessing a company's financial health.