© 2015 Cengage Learning. All Rights Reserved. Learning Objectives © 2015 Cengage Learning. All Rights Reserved. LO5 Calculate and analyze accounts receivable turnover ratios. LESSON6-3 Financial Analysis of Accounts Receivable

© 2015 Cengage Learning. All Rights Reserved. Financial Analysis of Accounts Receivable SLIDE 2 ACCOUNTS RECEIVABLE TURNOVER RATIO: The number of times the average amount of accounts receivable is collected during a specified period is called the accounts receivable turnover ratio. LO5 Lesson 6-3 © 2015 Cengage Learning. All Rights Reserved. DAYS’ SALES IN ACCOUNTS RECEIVABLE: The average period of time to collect an account receivable is called the days’ sales in accounts receivable. Days in Year ÷ Accounts Receivable Turnover Ratio = Days’ Sales in Accounts Receivable Net Sales on Account ÷ Average Book Value of Accounts Receivable = Accounts Receivable Turnover Ratio

© 2015 Cengage Learning. All Rights Reserved. Analyzing Accounts Receivable Ratios SLIDE 3 Lesson 6-3 © 2015 Cengage Learning. All Rights Reserved. A turnover ratio of 12.0 times means that the company receives payments on an average of 30 days or 365 days/12.0 accounts receivable turnover ratio. Since these data are higher than the company’s credit terms of 2/10, net 30, the company should consider implementing some actions to improve quicker collections. However, a business must weigh a change in credit policies against the effect the change will have on total sales. LO5

© 2015 Cengage Learning. All Rights Reserved. Actions to Create More Favorable Accounts Receivable Turnover Ratios ●Send account statements to customers more often, including a request for prompt payment. ●Not sell on account to any customer who has an account for which payment is overdue more than 30 days. ●Conduct a more rigorous credit check on new customers before extending credit to them. SLIDE 4 LO5 Lesson 6-3 © 2015 Cengage Learning. All Rights Reserved.

Lesson 6-3 Audit Your Understanding 1.What is the formula for calculating the accounts receivable turnover ratio? SLIDE 5 ANSWER Net sales on account divided by average book value of accounts receivable equals accounts receivable turnover ratio. Lesson 6-3 © 2015 Cengage Learning. All Rights Reserved.

Lesson 6-3 Audit Your Understanding 2.How would you interpret the situation of a business that desires an accounts receivable turnover ratio of 12.0 times but actually has a turnover ratio of 6.0 times? SLIDE 6 ANSWER Customers are taking about 60 days to pay their accounts. The business needs to encourage prompter payment in order to reduce the number of days to receive payment to 30 days. Lesson 6-3 © 2015 Cengage Learning. All Rights Reserved.

Lesson 6-3 Audit Your Understanding 3.How can extremely restrictive credit terms have a negative impact on a business? SLIDE 7 ANSWER Business can be lost as some customers may buy from competitors with less restrictive credit terms. Lesson 6-3 © 2015 Cengage Learning. All Rights Reserved.