1. Introduction to Accounting Preparing for a User’s Perspective
Compute and understand the Accounts Receivable Turnover ratio
Debits and Credits Trainer
By Kevin C. Kimball, CPA
with support from
Free Jan. 2014
Available on the Google Play Store

2. Management Effective Accounts Receivable turnover ratio indicates how:
Efficient
If we don’t collect cash soon, we can’t pay our suppliers.
Let’s approve him for $25 K in credit.
Credit approval
Purchase today
Payment later
Management

3. < --------------- Within One Month --------------- > Day 30
Sales Invoice
Payment terms: net 30
$100 Credit Sale
$100 Cash Receipt
Day 1
< Within One Month >
Day 30
Collect average AR balance every month?
AR will “turnover” about 12 times per year

4. Days to collect
Collection period
Days in receivables
AR turnover
Days to collect
Collection period
AR turnover
Days in receivables

5. ABC Tech Co.
DEF Tech Co.
AR turnover = 10
AR turnover = 20
(365 days / 10 AR turnover)
(365 days / 20 AR turnover)
= collect in 36.5 days
= collect in 18.3 days
More liquid

6. We aren’t managing our credit and collections very well
AR turnover
Collection period
January credit sale made
March invoice finally sent
Customers won’t pay on our error-filled invoices
We aren’t managing our credit and collections very well
We give credit to everyone
Why?
Our credit sales are fake
Etc.

7. AR turnover Collection period
Overly aggressive collection efforts
Cash only sales
Too short?
We might be over-managing our credit and collections
Why?
Credit only to the best

8. Effective and efficient credit and collection processes and procedures
Too strict?
Effective and efficient credit and collection processes and procedures
Not strict enough?

9. Accounts Receivable Turnover
Net Credit Sales
AR Turnover =
Average Accounts Receivable
Beg. AR + End. AR
Average AR = 2

10. + Net Credit Sales Credit sales - Credit sales returns and allowances
- Credit sales discounts
= Net sales
= Net credit sales +
Net credit sales
Net cash sales

11. Average Accounts Receivable
ABC Co.
Balance Sheet as of 12/31/X1
Assets
Cash $
Accounts Receivable 2,000
Etc.
ABC Co.
Balance Sheet as of 12/31/X2
Assets
Cash $1,200 Accounts Receivable
Etc.
$2,000
Average $1,300
$600
Beg. AR $2,000
+ End. AR $600
Average Accounts Receivable
$1,300 = 2

12. Accounts Receivable Turnover
Net Credit Sales $1,200
AR Turnover 15 =
Average Accounts Receivable $80
Beg. AR $100
+ End. AR $60
Average AR $80 = 2

13. AR Collection Period, Days in Receivables, Average Days to Collect
365
365 days per year
AR Collection Period = 24.3 days
AR Turnover Ratio of 15
Industry’s average days to collect
Company A’s average days to collect
$80 Credit Sale
$80 Cash Receipt
$80 Cash Receipt
Day 1
Day 24.3
Day 27

14. AR Collection Period (days)
AR Turnover Ratio
AR Collection Period (days)
Net Credit Sales
365 days per year
Average AR
AR Turnover Ratio
If you know 3 out of the four variables, you can solve for the fourth variable.
AR Turnover Ratio
18.25
AR Collection Period 20 days = =
Net Credit Sales $100 M
365 days per year
Average AR ?????
$5.48 M
AR Turnover Ratio
18.25

15. AR Collection Period (in days)
AR Turnover Ratio
Year X1 8.2
Year X2
12.1
Year X3
13.3
Year X4
14.8
Year X5
15.1
Year X6
15.9
AR Collection Period (in days)
Year X1
44.5
Year X2
30.2
Year X3
27.4
Year X4
24.7
Year X5
24.2
Year X6
23.0

16. What can we do to improve?
Company A
Industry
AR turnover = 8.1
AR turnover = 15
(365 days / 8.1 AR turnover)
(365 days / 15 AR turnover)
= collect in 45.1 days
= collect in 24.3 days
What can we do to improve?

17. Summary Be able to define and compute:
AR turnover ratio and AR collection period
Use the two ratios to assess management as compared to:
its own past
its industry

18. Introduction to Accounting Preparing for a User’s Perspective
Compute and understand the Accounts Receivable Turnover ratio
Debits and Credits Trainer
By Kevin C. Kimball, CPA
with support from
Free Jan. 2014
Available on the Google Play Store