Question

Calculate Trade Receivables Turnover Ratio in each of the following alternative cases:
Case 1: Net Credit Sales ₹4,00,000; Average Trade Receivables ₹1,00,000.

Case 2: Revenue from Operations (Net Sales) ₹30,00,000; Cash Revenue from Operations, i.e., Cash Sales ₹6,00,000; Opening Trade Receivables ₹2,00,000; Closing Trade Receivables ₹6,00,000.

Case 3: Cost of Revenue from Operations or Cost of Goods Sold ₹3,00,000; Gross Profit on Cost 25%; Cash Sales 20% of Total Sales; Opening Trade Receivables ₹50,000; Closing Trade Receivables ₹1,00,000.

Case 4: Cost of Revenue from Operations or Cost of Goods Sold ₹4,50,000; Gross Profit on Sales 20%; Cash Sales 25% of Net Credit Sales, Opening Trade Receivables ₹90,000; Closing Trade Receivables ₹60,000.

Answer 1

Case 1

Trade Receivable Turnover Ratio = `"Net Credit Sales"/"Average Trade Receivables"` 

Trade Receivable Turnover Ratio = `400000/100000` = 4 times

Case 2 

Net Credit Sales = Total Sales −Cash Sales

= 30,00,000 − 6,00,000 = 24,00,000

Average Trade Receivable = `("Opening Trade Receivable + Closing Trade Receivable ")/2`

Average Trade Receivable = `(200000 + 600000)/2 = 400000`

Trade Receivable Turnover Ratio = `"Net Credit Sales"/"Average Trade Receivables"` 

Trade Receivable Turnover Ratio = `2400000/400000` = 6 times

Case 3

Cost of Goods Sold = 3,00,000

Gross Profit = 25% on Cost

∴ Gross Profit =`25/100 xx 300000 = 75000`

Total Sales = Cost of Goods Sold + Gross Profit

= 3,00,000 + 75,000 = 3,75,000

Cash Sales = 20% of Total Sales

∴ Cash Sales = `375000 xx 20/100 = 75000`

Credit Sales = Total Sales − Cash Sales

= 3,75,000 − 75,000 = 3,00,000

Average Trade Receivable = `("Opening Trade Receivable + Closing Trade Receivable ")/2`

Average Trade Receivable = `(50000 + 100000)/2 = 75000`

Trade Receivable Turnover Ratio = `"Net Credit Sales"/"Average Trade Receivables"`

Trade Receivable Turnover Ratio = `300000/75000` = 4 times

Case 4 

Let Sales be = x 

Gross Profit = `x xx 20/100 = (20x)/100`

Sales = Cost of Goods Sold + Gross Profit

or, `x = 450000 + (20x)/100`

or, `x - 20/100 = 450000`

or,`x = (450000 xx 100)/80` = 562500

Sales = x = Rs 562500

Let Credit Sales be = a 

Cash Sales = `a xx 25/100 = (25a)/100`

Sales = Cash Sales + Credit sales 

or, `562500 = (25a)/100 + a`

or, `562500 = (125a)/100`

or,`a = (562500 xx 100)/125 = 450000`

Credit Sales = a = 450000

Average Trade Receivable = `("Opening Trade Receivable + Closing Trade Receivable ")/2`

Average Trade Receivable = `(90000 + 60000)/2 = 75000`

Trade Receivable Turnover Ratio = `"Net Credit Sales"/"Average Trade Receivables"`

Trade Receivable Turnover Ratio = `450000/75000` = 6 times