How is the accounts receivable turnover ratio calculated?



Q22. Accounts receivable turnover ratio
How is the accounts receivable turnover ratio calculated?

A22.
Accounts receivable turnover ratio
= Credit sales / Average accounts receivable

[Entity 22-a]
Credit sales = $5,075,000
Cash sales = $500,000
Beginning accounts receivable = $340,000
Ending accounts receivable = $360,000
Average accounts receivable
= ($340,000 + $360,000) / 2
= $350,000
Accounts receivable turnover ratio
= $5,075,000 / $350,000 = 14.5

[Entity 22-b]
Credit sales = $8,712,000
Cash sales = $600,000
Beginning accounts receivable = $710,000
Ending accounts receivable = $730,000
Average accounts receivable
= ($710,000 + $730,000) / 2
= $720,000
Accounts receivable turnover ratio
= $8,712,000 / $720,000 = 12.1

[Note]
Higher accounts receivable turnover ratio –> more active.
Thus in this example, Entity 22-a is more active in accounts receivable turnover than Entity 22-b.