accounting Made Simple 10

Question 1

1. What is a company’s RECEIVABLES TURNOVER RATIO?

Answer 1

( credit sales/ average accounts receivable ).

It shows how quickly a company is collecting upon its accounts receivable.

Question 2

2. What is the AVERAGE COLLECTION PERIOD RATIO?

Answer 2

( 365 / receivables turnover ).

It shows the AVERAGE LENGTH OF TIME that a receivable from a customer is outstanding prior to collection.

Question 3

3. Why track RECEIVABLES TURNOVER and AVERAGE COLLECTION PERIOD?

Answer 3

Higher RECEIVABLES TURNOVER and lower AVERAGE COLLECTION PERIOD is generally the goal.

Question 4

4. If a company’s AVERAGE COLLECTION PERIOD steadily increases from one year to the next, it could be an indication that:

Answer 4

The company needs to address its policies in terms of when and to whom it extends credit when making a sale.