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Question
Debtors (Receivables) Turnover Ratio can be calculated as ______?
Options
Net Credit sales/Average Accounts Receivable
Average Accounts Receivable/Net Credit sales
Net Total sales/Average Accounts Receivable
None of these
Solution
Debtors (Receivables) Turnover Ratio can be calculated as Net Credit sales/Average Accounts Receivable.
Explanation:
It describes the link between debtors and credit sales.
It is calculated as follows:
Debtors Turnover ratio = `"Net Credit sales"/ "Average Accounts Receivable"`
Where Average Account Receivable = `("Opening Debtors and Bills Receivable" + "Closing Debtors and Bills Receivable")/2`.
lt needs to be noted that debtors should be taken before making any provision for doubtful debts.
Significance: The firm's liquidity position is determined by the rate at which debtors are realized. This ratio illustrates how many times receivables are turned over and converted into cash throughout an accounting period.