Accounts Receivables Turnover Calculation Examples Help

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Understanding the meaning of Accounts Receivables Turnover

 

The accounts receivable turnover ratio measures how many times a business can collect its average accounts receivable during the year.It is an efficiency ratio that measures how many times a business can convert its account receivables into cash during a period.
 

This ratio shows how efficient a company is at collecting its credit sales from customers.
Accounts Receivables Turnover = Net Credit Sales/ Average Accounts Receivable
Cash sales are not included in Accounts Receivables Turnover calculation.
 

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Accounts Receivable Turnover Calculation Explanation

 

Net sales simply refer to sales minus returns and refunded sales. Let’s understand the calculation better with help of an example.
 

Example 1: A company’s Net Credit Sales 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
It means it will take 135 days to collect cash from sales or it means it is able to convert sales into cash 13 times a year.
 

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