Accounting – 6.1 Calculation and understanding of accounting ratios | e-Consult
6.1 Calculation and understanding of accounting ratios (1 questions)
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Calculation:
Trade Receivables Turnover (Days) = (Average Credit Receivables / Credit Sales) x 365
We are not given the average credit receivables, but we can assume it's the same as the credit sales for simplicity in this question.
Average Credit Receivables = £300,000
Trade Receivables Turnover (Days) = (£300,000 / £300,000) x 365
Trade Receivables Turnover (Days) = 1 x 365
Trade Receivables Turnover (Days) = 365 days
Answer: 365 days
Explanation:
- A high trade receivables turnover ratio (days) indicates that the company collects its debts quickly. This is generally desirable as it means the company has efficient credit management policies and reduces the risk of bad debts.
- A low trade receivables turnover ratio (days) indicates that the company takes a long time to collect its debts. This could be due to lenient credit terms, inefficient collection methods, or problems with customers' ability to pay.