Accounting & auditingLesson 1 of 1 in the course Measures of Financial Health

Operating Efficiency Ratios: Receivables, Assets, and Inventory

5 flashcards · 5 quiz questions · 5 match pairs · 4 fill-in sentences · English

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Summary

Accounts receivable turnover measures how quickly a company collects amounts customers owe. It helps managers and investors assess collection performance, liquidity, and the effects of credit policies.

The operating cycle is the time it takes a business to acquire or produce inventory and sell it. For a merchandising company, it includes bringing goods into inventory and selling those goods to customers.

All flashcards

Operating cycle
The time required to acquire or produce inventory and sell it.
Accounts receivable turnover
Net credit sales divided by average accounts receivable; estimates how often average receivables are collected.
Total asset turnover
Net sales divided by average total assets; measures sales generated per dollar of assets.
Inventory turnover
Cost of goods sold divided by average inventory; estimates how often inventory is sold and replaced.
Days’ sales in inventory
An estimate of how many days inventory represents relative to cost of goods sold.

Quiz questions

  1. Which calculation gives total asset turnover?Answer: Net sales divided by average total assets.
  2. A company has cost of goods sold of $60,000 and average inventory of $37,500. What is its inventory turnover?Answer: 1.6 times
  3. Which sales figure is used in accounts receivable turnover when it is available?Answer: Net credit sales, which exclude sales that do not create receivables.
  4. What is one possible risk of extremely high inventory turnover?Answer: Inventory may be too low to meet demand, causing stockouts.
  5. How should a company assess whether an efficiency ratio is unusual?Answer: Compare it with relevant industry, competitor, and historical results.

Based on Principles of Finance by Julie Dahlquist, Rainford Knight (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.

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