Accounts Receivable Turnover Ratio Analysis

Definition: Accounts Receivable Turnover Ratio calculate the number of times that trade receivables turnover during the accounting period. The higher the ratio, the faster the business is collecting its receivables.

Formula:

Accounts Receivable Turnover Ratio = Net Sales / Average Accounts Receivable

Example 1:
Total sales (include cash sales of $10,000): $70,000
Accounts Receivable: $50,000
Then,
Net Credit Sales = Total sales - Cash sales = 70,000 - 10,000 = $60,000
Accounts receivable turnover ratio = Net Credit Sales / Accounts Receivable = 60,000 / 50,000 = 1.2 times

Example 2:
PPM Ltd has the following information:
Accounts Receivable at 1 January 2009: $80,000
Total sales: $95,000
Sales returns: $15,000
Accounts Receivable at 31 December 2009: $60,000
Then,
Net sales = Total sales - Sales returns = 95,000 - 15,000 = $80,000
Average Accounts Receivable = (80,000 + 60,000) / 2 = $70,000
Accounts Receivable Turnover Ratio = 80,000 / 70,000 = 1.14 times

* Next: Inventory Turnover Ratio Examples