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What is Accounts Receivable Turnover?

Accounts Receivable Turnover is a financial ratio that measures how efficiently a company manages its accounts receivable. It is calculated by dividing the net credit sales by the average accounts receivable during a specific period. This ratio provides insights into how many times a company is able to convert its receivables into cash over a year.

Why is it important or used in Accounting?

Accounts Receivable Turnover is important in accounting for several reasons:

Advantages of Accounts Receivable Turnover:

Disadvantages of Accounts Receivable Turnover:

Example of Accounts Receivable Turnover for a Wholesaler or Retailer Business:

Let’s consider a wholesale distributor of electronics. The distributor had net credit sales of $2,000,000 for the fiscal year. At the beginning of the year, the accounts receivable were $250,000, and at the end of the year, they were $300,000.

Accounts Receivable Turnover = Net Credit Sales / Average Accounts Receivable

Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) / 2

Average Accounts Receivable = ($250,000 + $300,000) / 2 = $275,000

Accounts Receivable Turnover = $2,000,000 / $275,000 ≈ 7.27 times

This means that, on average, the distributor was able to collect its receivables approximately 7.27 times during the fiscal year. The interpretation of this ratio would depend on industry standards and the company’s specific circumstances. Generally, a higher turnover ratio is favorable, indicating efficient receivables management.

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