Wize University Introduction to Financial Accounting Textbook > Receivables
Receivables Turnover Ratio and Average Collection Period
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Receivables Turnover Ratio and Average Collection Period
The receivables turnover ratio and average collection period are liquidity ratios that measure how quickly and how often the company is collecting from its customers.
Receivables Turnover Ratio
- Measures how many times per period, on average, accounts receivables are collected
- A high ratio indicates strong liquidity.
- A low ratio indicates the company may have trouble collecting its receivables.
Wize Tip
Since companies don't typically report net credit sales, use net sales in its place.
Average Collection Period
- Measures how many days, on average, it takes to collect from customers.
- Should be less than the credit term Example: If net/30 is offered to customers, collection should take place in less than 30 days.
- Ideally greater than the discount period Example: If 2/10 is offered to customers, ideally collection happens in more than 10 days.
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Example: Receivables Turnover Ratio and Average Collection Period
For the year 2020, Abrakadabra Corp. reported the following:
The company also reported total sales of $2,000,000; sales discounts of $35,000; and sales returns and allowances of $50,000.
What is the receivables turnover ratio and average days to sell?
Practice: Receivables Turnover Ratio and Average Collection Period
Prepare the journal entry to record bad debt expense on October 31st, 2020. The company uses the percentage of receivables method to estimate its allowance for doubtful account, it estimates that 4% of receivables will never be collected. The company sales all have the same credit terms: 2/10, net/30. The following financial information is available:
What is the receivables turnover ratio?
Don't round your calculations, round final answer to 2 decimal places.