{"id":4122,"date":"2020-10-26T15:57:55","date_gmt":"2020-10-26T15:57:55","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-financialaccounting\/?post_type=chapter&#038;p=4122"},"modified":"2020-11-15T19:51:48","modified_gmt":"2020-11-15T19:51:48","slug":"cash-turnover-ratio","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/chapter\/cash-turnover-ratio\/","title":{"raw":"Cash Turnover Ratio","rendered":"Cash Turnover Ratio"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li style=\"font-weight: 400;\">Calculate the cash turnover ratio<\/li>\r\n<\/ul>\r\n<\/div>\r\n<img class=\"alignright wp-image-5262 \" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/05043400\/money-1673582_1280-1024x769.png\" alt=\"A cartoon of cash bills and coins. \" width=\"400\" height=\"301\" \/>The cash turnover ratio (CTR) is an efficiency ratio that shows the number of times cash is turned over in an accounting period. The cash turnover ratio works most effectively for companies that do not offer credit sales, however, for the sake of consistency, we\u2019ll calculate the ratio for our prototypical Jonick company.\r\n\r\nThe formula for calculating the cash turnover ratio is as follows:\r\n\r\n[latex]\\dfrac{\\text{Revenue}}{\\text{Average Cash and Cash Equivalents}}[\/latex]\r\n<ul>\r\n \t<li>For Jonick, sales for 2019 were $994,000.<\/li>\r\n \t<li>Cash at December 31, 2019 was: $373,000<\/li>\r\n \t<li>Cash at December 31, 2018 was: $331,000<\/li>\r\n \t<li>So the average cash was [latex]\\dfrac{373,000+331,000}{2}=\\$352,000[\/latex]<\/li>\r\n \t<li>That means the cash turnover ratio for 2019 was [latex]\\dfrac{994,000}{352,000} = 2.82[\/latex]<\/li>\r\n<\/ul>\r\nThe cash turnover ratio indicates how many times a company went through its cash balance over an accounting period and the efficiency of a company\u2019s cash in the generation of revenue. Additionally, the cash turnover ratio is often used by accountants for budgeting purposes.\r\n\r\nIn this case, over the course of one year (2019), the company generated in revenue almost three times the amount of cash. Another way to look at this is to divide the number of days in the year by the cash turnover ratio to get an estimate of the number of days that it takes for a company to replenish its cash balance. In this case, 365 days \/ 2.82 times per year = approximately 130 days.\r\n\r\nA higher cash turnover ratio is desirable, as it indicates a greater frequency of cash replenishment through revenue. However, it is important to note there is no one ideal cash turnover ratio number. As with other ratios, it should be compared to competitors and industry benchmarks.\r\n<table class=\"fin-table acctstatement\"><caption>Jonick Company\r\nComparative Income Statement\r\nFor the Years Ended December 31, 2019 and 2018<\/caption>\r\n<tbody>\r\n<tr>\r\n<th class=\"u-sr-only\" scope=\"col\">Description<\/th>\r\n<th scope=\"col\">2019<\/th>\r\n<th scope=\"col\">2018<\/th>\r\n<\/tr>\r\n<tr>\r\n<td>Sales<\/td>\r\n<td class=\"r\">$994,000<\/td>\r\n<td class=\"r\">$828,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Cost of merchandise sold<\/td>\r\n<td class=\"r\">414,000<\/td>\r\n<td class=\"r\">393,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Gross Profit<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$580,000<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$435,000<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n&nbsp;\r\n<table class=\"fin-table acctstatement\"><caption>Jonick Company\r\nComparative Balance Sheet\r\nDecember 31, 2019 and 2018<\/caption>\r\n<tbody>\r\n<tr>\r\n<th><\/th>\r\n<th scope=\"col\">2019<\/th>\r\n<th scope=\"col\">2018<\/th>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"3\"><span style=\"text-transform: uppercase;\"><strong>Assets<\/strong><\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Current assets:<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Cash<\/td>\r\n<td class=\"r\">$373,000<\/td>\r\n<td class=\"r\">$331,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Marketable securities<\/td>\r\n<td class=\"r\">248,000<\/td>\r\n<td class=\"r\">215,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Accounts receivable<\/td>\r\n<td class=\"r\">108,000<\/td>\r\n<td class=\"r\">91,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Merchandise Inventory<\/td>\r\n<td class=\"r\">55,000<\/td>\r\n<td class=\"r\">48,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Prepaid insurance<\/td>\r\n<td class=\"r\">127,000<\/td>\r\n<td class=\"r\">115,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 \u00a0 \u00a0 <strong>Total current assets<\/strong><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$911,000<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$800,000<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nThe key drawback of the cash turnover ratio is that it does not account for credit sales, which are sales made by customers in which the payment is delayed. The cash turnover ratio is most appropriate for companies that do not offer credit sales. Using the cash turnover ratio for companies that offer credit sales skews the CTR by making it larger than it really is.\r\n\r\nAdditionally, accumulating cash for future acquisitions skews the cash turnover ratio lower. The CTR is best used if the company\u2019s cash balance year-over-year does not see significant changes.\r\n\r\nWe'll cover additional ways to measure a company's liquidity in the next reading but first, let's test out your knowledge of CTR.\r\n<div class=\"textbox tryit\">\r\n<h3>PRACTICE QUESTION<\/h3>\r\nhttps:\/\/assessments.lumenlearning.com\/assessments\/23856\r\n\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li style=\"font-weight: 400;\">Calculate the cash turnover ratio<\/li>\n<\/ul>\n<\/div>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignright wp-image-5262\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/05043400\/money-1673582_1280-1024x769.png\" alt=\"A cartoon of cash bills and coins.\" width=\"400\" height=\"301\" \/>The cash turnover ratio (CTR) is an efficiency ratio that shows the number of times cash is turned over in an accounting period. The cash turnover ratio works most effectively for companies that do not offer credit sales, however, for the sake of consistency, we\u2019ll calculate the ratio for our prototypical Jonick company.<\/p>\n<p>The formula for calculating the cash turnover ratio is as follows:<\/p>\n<p>[latex]\\dfrac{\\text{Revenue}}{\\text{Average Cash and Cash Equivalents}}[\/latex]<\/p>\n<ul>\n<li>For Jonick, sales for 2019 were $994,000.<\/li>\n<li>Cash at December 31, 2019 was: $373,000<\/li>\n<li>Cash at December 31, 2018 was: $331,000<\/li>\n<li>So the average cash was [latex]\\dfrac{373,000+331,000}{2}=\\$352,000[\/latex]<\/li>\n<li>That means the cash turnover ratio for 2019 was [latex]\\dfrac{994,000}{352,000} = 2.82[\/latex]<\/li>\n<\/ul>\n<p>The cash turnover ratio indicates how many times a company went through its cash balance over an accounting period and the efficiency of a company\u2019s cash in the generation of revenue. Additionally, the cash turnover ratio is often used by accountants for budgeting purposes.<\/p>\n<p>In this case, over the course of one year (2019), the company generated in revenue almost three times the amount of cash. Another way to look at this is to divide the number of days in the year by the cash turnover ratio to get an estimate of the number of days that it takes for a company to replenish its cash balance. In this case, 365 days \/ 2.82 times per year = approximately 130 days.<\/p>\n<p>A higher cash turnover ratio is desirable, as it indicates a greater frequency of cash replenishment through revenue. However, it is important to note there is no one ideal cash turnover ratio number. As with other ratios, it should be compared to competitors and industry benchmarks.<\/p>\n<table class=\"fin-table acctstatement\">\n<caption>Jonick Company<br \/>\nComparative Income Statement<br \/>\nFor the Years Ended December 31, 2019 and 2018<\/caption>\n<tbody>\n<tr>\n<th class=\"u-sr-only\" scope=\"col\">Description<\/th>\n<th scope=\"col\">2019<\/th>\n<th scope=\"col\">2018<\/th>\n<\/tr>\n<tr>\n<td>Sales<\/td>\n<td class=\"r\">$994,000<\/td>\n<td class=\"r\">$828,000<\/td>\n<\/tr>\n<tr>\n<td>Cost of merchandise sold<\/td>\n<td class=\"r\">414,000<\/td>\n<td class=\"r\">393,000<\/td>\n<\/tr>\n<tr>\n<td>Gross Profit<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$580,000<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$435,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>&nbsp;<\/p>\n<table class=\"fin-table acctstatement\">\n<caption>Jonick Company<br \/>\nComparative Balance Sheet<br \/>\nDecember 31, 2019 and 2018<\/caption>\n<tbody>\n<tr>\n<th><\/th>\n<th scope=\"col\">2019<\/th>\n<th scope=\"col\">2018<\/th>\n<\/tr>\n<tr>\n<td colspan=\"3\"><span style=\"text-transform: uppercase;\"><strong>Assets<\/strong><\/span><\/td>\n<\/tr>\n<tr>\n<td colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Current assets:<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Cash<\/td>\n<td class=\"r\">$373,000<\/td>\n<td class=\"r\">$331,000<\/td>\n<\/tr>\n<tr>\n<td>Marketable securities<\/td>\n<td class=\"r\">248,000<\/td>\n<td class=\"r\">215,000<\/td>\n<\/tr>\n<tr>\n<td>Accounts receivable<\/td>\n<td class=\"r\">108,000<\/td>\n<td class=\"r\">91,000<\/td>\n<\/tr>\n<tr>\n<td>Merchandise Inventory<\/td>\n<td class=\"r\">55,000<\/td>\n<td class=\"r\">48,000<\/td>\n<\/tr>\n<tr>\n<td>Prepaid insurance<\/td>\n<td class=\"r\">127,000<\/td>\n<td class=\"r\">115,000<\/td>\n<\/tr>\n<tr>\n<td>\u00a0 \u00a0 \u00a0 <strong>Total current assets<\/strong><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$911,000<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$800,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>The key drawback of the cash turnover ratio is that it does not account for credit sales, which are sales made by customers in which the payment is delayed. The cash turnover ratio is most appropriate for companies that do not offer credit sales. Using the cash turnover ratio for companies that offer credit sales skews the CTR by making it larger than it really is.<\/p>\n<p>Additionally, accumulating cash for future acquisitions skews the cash turnover ratio lower. The CTR is best used if the company\u2019s cash balance year-over-year does not see significant changes.<\/p>\n<p>We&#8217;ll cover additional ways to measure a company&#8217;s liquidity in the next reading but first, let&#8217;s test out your knowledge of CTR.<\/p>\n<div class=\"textbox tryit\">\n<h3>PRACTICE QUESTION<\/h3>\n<p>\t<iframe id=\"lumen_assessment_23856\" class=\"resizable\" src=\"https:\/\/assessments.lumenlearning.com\/assessments\/load?assessment_id=23856&#38;embed=1&#38;external_user_id=&#38;external_context_id=&#38;iframe_resize_id=lumen_assessment_23856\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:400px;\"><br \/>\n\t<\/iframe><\/p>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-4122\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Cash Turnover Ratio. <strong>Authored by<\/strong>: Joseph Cooke. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Principles of Financial Accounting. <strong>Authored by<\/strong>: Christine Jonick. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/web.ung.edu\/media\/university-press\/Principles-of-Financial-Accounting.pdf?t=1601063299615\">https:\/\/web.ung.edu\/media\/university-press\/Principles-of-Financial-Accounting.pdf?t=1601063299615<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by-sa\/4.0\/\">CC BY-SA: Attribution-ShareAlike<\/a><\/em><\/li><li><strong>Authored by<\/strong>: Memed Nurrohmad. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/pixabay.com\/illustrations\/money-coin-cash-finance-currency-1673582\/\">https:\/\/pixabay.com\/illustrations\/money-coin-cash-finance-currency-1673582\/<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/about\/cc0\">CC0: No Rights Reserved<\/a><\/em>. <strong>License Terms<\/strong>: https:\/\/pixabay.com\/service\/terms\/#license<\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":90270,"menu_order":9,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Cash Turnover Ratio\",\"author\":\"Joseph Cooke\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"Principles of Financial 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