account+receivable+turnover+ratio

http://accountingexplained.com/financial/ratios/receivables-turnover We can obtain the net credit sales figure from the [|income statement] of a company. Average accounts receivable figure may be calculated simply by dividing the sum of beginning and ending accounts receivable by 2. The beginning and ending accounts receivable can be found on the [|balance sheets] of the first and the last day of the accounting period. Accounts receivable turnover is usually calculated on annual basis, however for the purpose of creating trends, it is more meaningful to calculate it on monthly or quarterly basis.
 * = Receivables || = ||= Net Credit Sales ||
 * = Turnover ||^  ||= Average Accounts Receivable ||

Analysis
Accounts receivable turnover measures the efficiency of a business in collecting its credit sales. Generally a high value of accounts receivable turnover is favorable and lower figure may indicate inefficiency in collecting outstanding sales. Increase in accounts receivable turnover overtime generally indicates improvement in the process of [|cash collection] on credit sales. However, a normal level of receivables turnover is different for different industries. Also, very high values of this ratio may not be favourable, if achieved by extremely strict credit terms since such policies may repel potential buyers.

Examples
**Example 1:** Net credit sales of Company A during the year ended June 30, 2010 were $644,790. Its accounts receivable at July 1, 2009 and June 30, 2010 were $43,300 and $51,730 respectively. Calculate the receivables turnover ratio. __Solution__

Average Accounts Receivable = ($43,300 + $51,730) ÷ 2 = $47,515

Receivables Turnover Ratio = $644,790 ÷ $47,515 ≈ 13.57 **Example 2:** Total sales of Company B during the year ended December 31, 2010 were $984,000. Customers returned goods invoiced at $31,400 during the year. Average accounts receivable during the period were $23,880. Calculate accounts receivable turnover ratio. <span style="background-color: rgba(255,255,255,0);">__Solution__

<span style="background-color: rgba(255,255,255,0);">Net Credit Sales = $984,000 − $31,400 = $952,600

<span style="background-color: rgba(255,255,255,0);">Receivables Turnover = $952,600 ÷ $23,880 ≈ 39.89

=<span style="background-color: rgba(255,255,255,0);">Days' Sales Outstanding (DSO) Ratio = <span style="background-color: rgba(255,255,255,0);"> <span style="background-color: rgba(255,255,255,0);">Days' sales outstanding ratio (also called //average collection period// or //days' sales in receivables//) is used to measure the average number of days a business takes to collect its trade receivables after they have been created. It is an activity ratio and gives information about the efficiency of sales collection activities.
 * <span style="background-color: rgba(255,255,255,0); display: block; vertical-align: baseline;"> || <span style="background-color: rgba(255,255,255,0);"> || <span style="background-color: rgba(255,255,255,0);"> ||

<span style="background-color: rgba(255,255,255,0);">Formula
<span style="background-color: rgba(255,255,255,0);">Days Sales Outstanding is calculated using following formula: <span style="background-color: rgba(255,255,255,0);">If possible, use the average accounts receivable during the period. <span style="background-color: rgba(255,255,255,0);">Another formula which uses the [|accounts receivable turnover] is:
 * <span style="background-color: rgba(255,255,255,0);">DSO = ||= <span style="background-color: rgba(255,255,255,0);">Accounts Receivable || <span style="background-color: rgba(255,255,255,0);"> × Number of Days ||
 * ^  ||= <span style="background-color: rgba(255,255,255,0);">Credit Sales ||^   ||
 * <span style="background-color: rgba(255,255,255,0);">DSO = ||= <span style="background-color: rgba(255,255,255,0);">Number of Days in the Period ||
 * ^  ||= <span style="background-color: rgba(255,255,255,0);">Accounts Receivable Turnover ||

<span style="background-color: rgba(255,255,255,0);">Analysis
<span style="background-color: rgba(255,255,255,0);">Since it is profitable to convert sales into cash quickly, which means that a lower value of Days Sales Outstanding is favorable whereas a higher value is unfavorable. However it is more meaningful to create monthly or weekly trend of DSO. Any significant increase in the trend is unfavorable and indicates inefficiency in credit sales collection.

<span style="background-color: rgba(255,255,255,0);">Examples
<span style="background-color: rgba(255,255,255,0);">**Example 1:** Calculate the Days Sales Outstanding from the following information:

<span style="background-color: rgba(255,255,255,0);">Net Credit Sales during the month: $644,790

<span style="background-color: rgba(255,255,255,0);">Average Accounts Receivable during the month: $43,300.

<span style="background-color: rgba(255,255,255,0);">Calculate the receivables turnover ratio. <span style="background-color: rgba(255,255,255,0);">__Solution__

<span style="background-color: rgba(255,255,255,0);">Days Sales Outstanding = ( $43,300 / $644,790 ) × 30 days = 2.01 <span style="background-color: rgba(255,255,255,0);">**Example 2:** Following is the trend of DSO for β company for past 6 months: <span style="background-color: rgba(255,255,255,0);">**Question** Is the average collection period for β Company improving or deteriorating? <span style="background-color: rgba(255,255,255,0);">__Answer__
 * = <span style="background-color: rgba(255,255,255,0);">Month ||> <span style="background-color: rgba(255,255,255,0);">DSO ||
 * = <span style="background-color: rgba(255,255,255,0);">01 ||> <span style="background-color: rgba(255,255,255,0);">3.10 ||
 * = <span style="background-color: rgba(255,255,255,0);">02 ||> <span style="background-color: rgba(255,255,255,0);">3.13 ||
 * = <span style="background-color: rgba(255,255,255,0);">03 ||> <span style="background-color: rgba(255,255,255,0);">3.48 ||
 * = <span style="background-color: rgba(255,255,255,0);">04 ||> <span style="background-color: rgba(255,255,255,0);">3.95 ||
 * = <span style="background-color: rgba(255,255,255,0);">05 ||> <span style="background-color: rgba(255,255,255,0);">4.16 ||
 * = <span style="background-color: rgba(255,255,255,0);">06 ||> <span style="background-color: rgba(255,255,255,0);">5.31 ||

<span style="background-color: rgba(255,255,255,0);">The average collection period has a deteriorating trend. <span style="background-color: rgba(255,255,255,0);">Written by Irfanullah Jan <span style="background-color: rgba(255,255,255,0);">
 * <span style="background-color: rgba(255,255,255,0); display: block; vertical-align: baseline;"> || <span style="background-color: rgba(255,255,255,0);"> || <span style="background-color: rgba(255,255,255,0);"> ||

<span style="background-color: rgba(255,255,255,0);">Related Topics

 * <span style="background-color: rgba(255,255,255,0); text-decoration: none;">[|Receivables Turnover Ratio]
 * <span style="background-color: rgba(255,255,255,0); text-decoration: none;">[|Cash Conversion Cycle]
 * <span style="background-color: rgba(255,255,255,0); text-decoration: none;">[|Receivables]
 * <span style="background-color: rgba(255,255,255,0); text-decoration: none;">[|Days' Inventory on Hand]
 * <span style="color: #494949; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 12px;">