BUS 552 Accounting / Week 6 HW

Textbook p.320  / E6-20                               

Computing and Interpreting the Receivables Turnover Ratio

(Refer to the data reported by Dell, Inc.)

1. Determine the accounts receivable turnover ratio and average days sales in receivables for the current year.

The receivables turnover ratio is composed as following formula:

Accounts Receivable Turnover Ratio = annual credit sales / average accounts receivable

So, the current year receivables turnover ratio for Dell, Inc.:

                              $41,444,000

              ------------------------------------------   = 13.3

               ($2,586,000 + $3,635,000) / 2

365 / receivables turnover ratio is average days sales in receivables, which indicates the average time it takes a customer to pay its accounts. For Dell, Inc., the amount would be computed as follows for current year:

365 / 13.3 = 27.4 (days)

2. Explain the meaning of each number.

The receivables turnover ratio is an activity ratio, measuring how efficiently a company uses its assets. It is usually a positive sign if a company is with a high, or increasing accounts receivables turnover ratio – it means that the company is well executing its credit policies and quickly turning its accounts receivable into cash. But it also needs to be considered if the company is too strict in its credit policies, which might be missing out on potential sales.

The average days sales is a calculation used by a company to estimate their average collection period. A low number of days indicates that the company collects its outstanding receivables quickly. So, in this case, Dell has its account receivable policy (term) at net 27.4 days.