Question

What financial statement ratios facilitate the measurement of a company's effectiveness in collecting cash from customers? What is measured by each of these ratios? How should each of these ratios be interpreted?

Answer 1

There are various ratios which helps to determine the effectiveness of cash collection from customer like Average Accounts Turnover Ratio, Average Collection Period

Average Accounts Turnover Ratio is an efficency ratio it tell us that how many time we can receive the payment from our customers. for example if Average Accounts Turnover Ratio is 6 Times it means we will receive payment from customer 6 Times during the year

Average Collection period represent Average no. of days take to receive their payment form customer for example if average collection period is 30days then it means company is receiving their amount of credit sales within 30 days.

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