![]() ![]() Average receivables is calculated by adding the beginning and ending receivables for the year and dividing by two. The net credit sales can usually be found on the company’s income statement for the year although not all companies report cash and credit sales separately. ![]() Net sales simply refers to sales minus returns and refunded sales. Only credit sales establish a receivable, so the cash sales are left out of the calculation. The reason net credit sales are used instead of net sales is that cash sales don’t create receivables. Companies are more liquid the faster they can covert their receivables into cash.Īccounts receivable turnover is calculated by dividing net credit sales by the average accounts receivable for that period. In some ways the receivables turnover ratio can be viewed as a liquidity ratio as well. Some companies collect their receivables from customers in 90 days while other take up to 6 months to collect from customers. This ratio shows how efficient a company is at collecting its credit sales from customers. If a company had $20,000 of average receivables during the year and collected $40,000 of receivables during the year, the company would have turned its accounts receivable twice because it collected twice the amount of average receivables. In other words, the accounts receivable turnover ratio measures how many times a business can collect its average accounts receivable during the year.Ī turn refers to each time a company collects its average receivables. Accounts receivable turnover is an efficiency ratio or activity ratio that measures how many times a business can turn its accounts receivable into cash during a period. ![]()
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