Q23RQ - Horngren'S Financial And Managerial Accounting

Question

What does the accounts receivable turnover ratio measure, and how is it calculated?

Step-by-Step Solution

Answer

The accounts receivable turnover ratio measures how usually the company can collect the amount of average accounts receivable in a year.

Step 1: Meaning of Account Receivables

Accounts receivables refer to that portion of sales against which the amount is still pending from the customers. It is a current asset of the company.

Step 2: Calculation of accounts receivable turnover ratio

The accounts turnover ratio of the company indicates how efficiently a company is collecting the amount of account receivables. The higher the ratio, the fast is the cash collections. 

$Accounts Receivable Turnover Ratio=\frac{Net Credit Sales}{Average Net Accounts Receivables}$