Question

How Do I Calculate Accounts Receivable Turnover Ratio? Give An Example.

Answer 1

Answer:-Formula:- Accounts receivable turnover ratio = Net credit sales/Average accounts receivable

Example:-Watson Sports shop is a retail store that sells outdoor skiing equipment. Watson offers accounts to all of his main customers. At the end of the year, Watson balance sheet shows $20,000 in accounts receivable, $75,000 of gross credit sales, and $25,000 of returns. Last year’s balance sheet showed $10,000 of accounts receivable.

The first thing we need to do in order to calculate Watson turnover is to calculate net credit sales and average accounts receivable. Net credit sales equals gross credit sales minus returns (75,000 – 25,000 = 50,000). Average accounts receivable can be calculated by averaging beginning and ending accounts receivable balances ((10,000 + 20,000) / 2 = 15,000).

Finally, Watson accounts receivable turnover ratio for the year can be like this:-

=$50000/$15000 =3.33 times

Watson accounts receivable turnover ratio is 3.33 times. This means that Watson collects his receivables about 3.3 times a year or once every 110 days. In other words, when Watson makes a credit sale, it will take him 110 days to collect the cash from that sale.