![]() ![]() The inventory turnover ratio measures the amount of inventory that must be maintained to support a given amount of sales. Net Annual Credit Sales ÷ ((Beginning Accounts Receivable + Ending Accounts Receivable) / 2) Inventory Turnover Ratio 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. It can be impacted by the corporate credit policy, payment terms, the accuracy of billings, the activity level of the collections staff, the promptness of deduction processing, and a multitude of other factors. ![]() The accounts receivable turnover ratio measures the time it takes to collect an average amount of accounts receivable. Examples of turnover ratios are noted below. Conversely, a low liability turnover ratio (usually in relation to accounts payable) is considered good, since it implies that a company is taking the longest possible amount of time in which to pay its suppliers, and so retains its cash for a longer period of time. This implies a minimal need for invested funds, and therefore a high return on investment. In most cases, a high asset turnover ratio is considered good, since it implies that receivables are collected quickly, fixed assets are heavily utilized, and little excess inventory is kept on hand. The concept is useful for determining the efficiency with which a business utilizes its assets. A turnover ratio represents the amount of assets or liabilities that a company replaces in relation to its sales. ![]()
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