{"id":4128,"date":"2020-10-26T16:05:01","date_gmt":"2020-10-26T16:05:01","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-financialaccounting\/?post_type=chapter&#038;p=4128"},"modified":"2020-11-15T20:06:47","modified_gmt":"2020-11-15T20:06:47","slug":"accounts-receivable-turnover","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/chapter\/accounts-receivable-turnover\/","title":{"raw":"Accounts Receivable Turnover","rendered":"Accounts Receivable Turnover"},"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 accounts receivable turnover and number of days sales in receivables<\/li>\r\n<\/ul>\r\n<\/div>\r\nAccounts receivable turnover is the number of times per year a business collects its average accounts receivable. The ratio is used to evaluate the ability of a company to efficiently issue credit to its customers and collect funds from them in a timely manner.\r\n\r\nTo calculate receivables turnover, add together beginning and ending accounts receivable to arrive at the average accounts receivable for the measurement period, and divide into the net credit sales for the year. The formula is as follows:\r\n\r\n[latex]\\dfrac{\\text{Net Annual Credit Sales}}{\\frac{\\text{Beginning Accounts Receivable} + \\text{Ending Accounts Receivable}}{2}}[\/latex]\r\n\r\nFor example:\u00a0[latex]\\dfrac{994,000}{\\frac{108,000 + 91,000}{2}}=10.0[\/latex]\r\n<div class=\"table-wrapper\">\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 class=\"highlight\">Sales<\/td>\r\n<td class=\"r highlight\">$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<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<\/tr>\r\n<tr>\r\n<td colspan=\"2\"><span style=\"text-transform: uppercase;\"><strong>Assets<\/strong><\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"2\"><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<\/tr>\r\n<tr>\r\n<td>Marketable securities<\/td>\r\n<td class=\"r\">248,000<\/td>\r\n<\/tr>\r\n<tr class=\"highlight\">\r\n<td>Accounts receivable<\/td>\r\n<td class=\"r\">108,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Merchandise Inventory<\/td>\r\n<td class=\"r\">55,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Prepaid insurance<\/td>\r\n<td class=\"r\">127,000<\/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<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\nThe more often customers pay off their invoices, the more cash is available to the firm to pay bills and debts, and less possibility that customers will never pay at all.\r\n\r\nA high turnover ratio could indicate a credit policy, an aggressive collections department, a number of high-quality customers, or a combination of those factors.\r\n\r\nA low receivable turnover may be caused by a loose or nonexistent credit policy, an inadequate collections function, and\/or a large proportion of customers having financial difficulties. A low turnover level could also indicate an excessive amount of bad debt and therefore an opportunity to collect excessively old accounts receivable that are unnecessarily tying up working capital. It may be useful to track accounts receivable turnover on a trend line in order to see if turnover is slowing down; if so, an increase in funding for the collections staff may be required, or at least a review of why turnover is worsening.\r\n<h2>Average Collection Period<\/h2>\r\nThe days' sales in accounts receivable ratio (also known as the average collection period) tells you the number of days it took on average to collect the company's accounts receivable during the past year.\r\n\r\nThe days' sales in accounts receivable is calculated as follows: the number of days in the year (use 360 or 365) divided by the accounts receivable turnover ratio during a past year.\r\n\r\n<img class=\"alignright wp-image-5269 \" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/05043939\/laptop-2557468_1920.jpg\" alt=\"A businessman sitting at his desk on a laptop.\" width=\"400\" height=\"267\" \/>\r\n\r\nIn our example, this would be [latex]\\dfrac{365}{10} = 36.5[\/latex] days on average to collect cash from a sale on account.\r\n\r\nThis ratio, like any other, is a high-level indicator, designed to bring attention to problem areas.\r\n\r\nIt is possible that within the average accounts receivable balances some receivables are 60, 90, or even 120 days or more past due that are skewing the average. Therefore, it is best to review an aging of accounts receivable by customer to understand the detail behind the days' sales in accounts receivable ratio.\r\n\r\nNow, let\u2019s check your understanding of this topic.\r\n<div class=\"textbox tryit\">\r\n<h3>PRACTICE QUESTIONS<\/h3>\r\nhttps:\/\/assessments.lumenlearning.com\/assessments\/23859\r\n\r\nhttps:\/\/assessments.lumenlearning.com\/assessments\/23860\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 accounts receivable turnover and number of days sales in receivables<\/li>\n<\/ul>\n<\/div>\n<p>Accounts receivable turnover is the number of times per year a business collects its average accounts receivable. The ratio is used to evaluate the ability of a company to efficiently issue credit to its customers and collect funds from them in a timely manner.<\/p>\n<p>To calculate receivables turnover, add together beginning and ending accounts receivable to arrive at the average accounts receivable for the measurement period, and divide into the net credit sales for the year. The formula is as follows:<\/p>\n<p>[latex]\\dfrac{\\text{Net Annual Credit Sales}}{\\frac{\\text{Beginning Accounts Receivable} + \\text{Ending Accounts Receivable}}{2}}[\/latex]<\/p>\n<p>For example:\u00a0[latex]\\dfrac{994,000}{\\frac{108,000 + 91,000}{2}}=10.0[\/latex]<\/p>\n<div class=\"table-wrapper\">\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 class=\"highlight\">Sales<\/td>\n<td class=\"r highlight\">$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<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<\/tr>\n<tr>\n<td colspan=\"2\"><span style=\"text-transform: uppercase;\"><strong>Assets<\/strong><\/span><\/td>\n<\/tr>\n<tr>\n<td colspan=\"2\"><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<\/tr>\n<tr>\n<td>Marketable securities<\/td>\n<td class=\"r\">248,000<\/td>\n<\/tr>\n<tr class=\"highlight\">\n<td>Accounts receivable<\/td>\n<td class=\"r\">108,000<\/td>\n<\/tr>\n<tr>\n<td>Merchandise Inventory<\/td>\n<td class=\"r\">55,000<\/td>\n<\/tr>\n<tr>\n<td>Prepaid insurance<\/td>\n<td class=\"r\">127,000<\/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<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>The more often customers pay off their invoices, the more cash is available to the firm to pay bills and debts, and less possibility that customers will never pay at all.<\/p>\n<p>A high turnover ratio could indicate a credit policy, an aggressive collections department, a number of high-quality customers, or a combination of those factors.<\/p>\n<p>A low receivable turnover may be caused by a loose or nonexistent credit policy, an inadequate collections function, and\/or a large proportion of customers having financial difficulties. A low turnover level could also indicate an excessive amount of bad debt and therefore an opportunity to collect excessively old accounts receivable that are unnecessarily tying up working capital. It may be useful to track accounts receivable turnover on a trend line in order to see if turnover is slowing down; if so, an increase in funding for the collections staff may be required, or at least a review of why turnover is worsening.<\/p>\n<h2>Average Collection Period<\/h2>\n<p>The days&#8217; sales in accounts receivable ratio (also known as the average collection period) tells you the number of days it took on average to collect the company&#8217;s accounts receivable during the past year.<\/p>\n<p>The days&#8217; sales in accounts receivable is calculated as follows: the number of days in the year (use 360 or 365) divided by the accounts receivable turnover ratio during a past year.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignright wp-image-5269\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/05043939\/laptop-2557468_1920.jpg\" alt=\"A businessman sitting at his desk on a laptop.\" width=\"400\" height=\"267\" \/><\/p>\n<p>In our example, this would be [latex]\\dfrac{365}{10} = 36.5[\/latex] days on average to collect cash from a sale on account.<\/p>\n<p>This ratio, like any other, is a high-level indicator, designed to bring attention to problem areas.<\/p>\n<p>It is possible that within the average accounts receivable balances some receivables are 60, 90, or even 120 days or more past due that are skewing the average. Therefore, it is best to review an aging of accounts receivable by customer to understand the detail behind the days&#8217; sales in accounts receivable ratio.<\/p>\n<p>Now, let\u2019s check your understanding of this topic.<\/p>\n<div class=\"textbox tryit\">\n<h3>PRACTICE QUESTIONS<\/h3>\n<p>\t<iframe id=\"lumen_assessment_23859\" class=\"resizable\" src=\"https:\/\/assessments.lumenlearning.com\/assessments\/load?assessment_id=23859&#38;embed=1&#38;external_user_id=&#38;external_context_id=&#38;iframe_resize_id=lumen_assessment_23859\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:400px;\"><br \/>\n\t<\/iframe><\/p>\n<p>\t<iframe id=\"lumen_assessment_23860\" class=\"resizable\" src=\"https:\/\/assessments.lumenlearning.com\/assessments\/load?assessment_id=23860&#38;embed=1&#38;external_user_id=&#38;external_context_id=&#38;iframe_resize_id=lumen_assessment_23860\" 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-4128\">\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>Accounts Receivable Turnover. <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>: StockSnap. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/pixabay.com\/photos\/laptop-code-programming-computer-2557468\/\">https:\/\/pixabay.com\/photos\/laptop-code-programming-computer-2557468\/<\/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 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