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Main Finance Terms accounts receivable turnover

accounts receivable turnover



degree of realization risk in accounts receivable. The lower the turnover rate, the longer receivables are being held-and the less likely they are to be collected. Also, there is anopportunity costof tying up funds in receivables for a longer period of time. The accounts receivable turnover equals:

Annual Credit Sales
Average Accounts Receivable

Assume annual credit sales are $100,000, beginning-of-year accounts receivable are $30,000, and end-of-year accounts receivable are $20,000. The turnover is:

If sales vary greatly during the year, this ratio can become distorted unless proper averaging takes place. In such a case, quarterly or monthly sales figures should be used.


Dictionary of Finance and Investment Terms
accounts receivable turnover

ratio obtained by dividing total credit sales by accounts receivable. The ratio indicates how many times the receivables portfolio has been collected during the accounting period.

See alsocollection ratio,accounts receivable,aging schedule
Dictionary of Banking Terms
accounts receivable turnover

ratio of total credit sales to average accounts receivable during an accounting period, a measure of an organization's ability to convert inventory into cash, and thus, financial efficiency. Close attention should be paid to credit terms, billing procedures, and company and industry trends.

See alsobalance sheet ratios,ratio analysis
Dictionary of Business Terms
accounts receivable turnover

ratio obtained by dividing total credit sales by accounts receivable. The ratio indicates how many times the receivables portfolio has been collected during the accounting period.

See alsoaccounts receivable,collection ratio
Related Terms:
Dictionary of Finance and Investment Terms
collection ratio

ratio of a company's accounts receivable to its average daily sales. Average daily sales are obtained by dividing sales for an accounting period by the number of days in the accounting period-annual sales divided by 365, if the accounting period is a year. That result, divided into accounts receivable (an average of beginning and ending accounts receivable is more accurate), is the collection ratio-the average number of days it takes the company to convert receivables into cash. It is also called average collection period.


Dictionary of Finance and Investment Terms
accounts receivable

amounts due the company on account from customers who have bought merchandise or received services. Accounts receivable are presented as a current asset in the balance sheet.


Dictionary of Finance and Investment Terms
aging schedule

classification of trade accounts receivable by date of sale. Usually prepared by a company's auditor, the aging, as the schedule is called, is a vital tool in analyzing the quality of a company's receivables investment. It is frequently required by grantors of credit.

The schedule is most often seen as: (1) a list of the amount of receivables by the month in which they were created- (2) a list of receivables by maturity, classified as current or as being in various stages of delinquency. The following is a typical aging schedule.

dollars (in thousands)
Current (under 30 days)$14,06561%
1-30 days past due3,72516
31-60 days past due2,90012
61-90 days past due1,8008
Over 90 days past due750 3
23,240100%

The aging schedule reveals patterns of delinquency and shows where collection efforts should be concentrated. It helps in evaluating the adequacy of the reserve for bad debt, because the longer accounts stretch out the more likely they are to become uncollectible. Using the schedule can help prevent the loss of future sales, since old customers who fall too far behind tend to seek out new sources of supply.


Dictionary of Banking Terms
balance sheet ratios

ratios used in examining the financial condition, and changes in financial position, of any company, based on data reported in the balance sheet. Certain ratios are particularly applicable to banks. The most important are the capital ratio (measuring the ratio of equity capital to total assets) and liquidity ratios (measuring a bank's ability to cover deposit withdrawals and pay out funds to meet the credit needs of its borrowers). Other useful ratios are the loan-to-deposit ratio (total loans divided by total deposits) the charge-off ratio (net charge-offs as a percentage of total loans), the loan loss reserve ratio (loan loss reserves for potential bad loans as a percentage of total loans), and the ratio of nonperforming asset to total loans. See also Net Interest Margin (NIM)- Return On Assets (ROA)- Return On Equity (ROE). accounting ratios used by bank credit officers in evaluating creditworthiness of borrowers. The most widely used are: the acid-test ratio or quick ratio (short-term assets divided by current liabilities)- the current ratio (current assets divided by current liabilities)- and the debt coverage ratio (working capital divided by long-term debt). Financial ratios can be measured against ratios in prior years, or industry averages, for quick, easy comparison. Key performance ratios, such as the leverage ratio (long-term debt as a percentage of shareholder net worth), are frequently used in pricing commercial loans. A loan might have an interest spread over a base rate, for example, the bank prime rate plus 25 basis points if financial leverage is kept at, or below, a certain level. See also ratio analysis.


Dictionary of Banking Terms
ratio analysis

study undertaken by financial statement preparers and users to evaluate the financial strength or weakness of a company and its operating trend. Various ratios are computed, depending upon the objective of the user analyzing the financial statements. Short-term creditors are primarily concerned with a company's ability to meet short-term debt from current assets, so they concentrate on the liquidity ratio emphasizing cash flow. Long-term creditors want to be paid back in the long term, so they look to solvency ratios such as total debt to total stockholders' equity. Potential investors are interested in dividends and appreciation in market price of stock, so they focus on profitability ratios (e.g., profit margin) and market measures (e.g., price-earnings ratio). Auditors zero in on the going concern of the client by determining its ability to meet debt (e.g., interest coverage ratio). Also, auditors wanting to know where to concentrate their audit attention look for illogical relationships in accounts over time such as the ratio of promotion and entertainment expense to sales. The limitations of financial ratios for analytical purposes must be considered, including: (1) a ratio is static in nature and does not reveal future flows- (2) a ratio does not reveal the amount of its components (e.g., a current ratio figure does not tell you how much is in cash or inventory)- (3) a ratio does not reveal the quality of its components (e.g., a high current ratio that is made up of poor quality receivables and obsolete inventory)- and (4) a ratio is based on historical cost not taking into account inflation.


Dictionary of Business Terms
accounts receivable

amounts due the company on account from customers who have bought merchandise or received services. Accounts receivable are presented as a current asset in the balance sheet.


Dictionary of Business Terms
collection ratio

ratio of a company's accounts receivable to its average daily sales. Average daily sales are obtained by dividing sales for an accounting period by the number of days in the accounting period-annual sales divided by 365, if the accounting period is a year. That result, divided into accounts receivable (an average of beginning and ending accounts receivable is more accurate), is the collection ratio-the average number of days it takes the company to convert receivables into cash. It is also called average collection period.


Referring Terms:
accounts receivable
accounts receivable
collection ratio
receivable turnover


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accounts receivable turnover