Question

Calculate Trade Receivable Turnover Ratio and Average Collection Period from the following :

$\begin{array}{cc}& \text{Rs.}\\ \text{Total Revenue from Operations for the year (Total Sales)}& 4,00,000\\ \text{Closing Trade Receivable}& \text{1,00,000}\\ \text{Excess of Closing Trade Receivables over Opening Trade Receivables}& \text{40,000}\end{array}$

Cash Revenue from Operations (Cash Sales):
Being 25 % of Credit Revenue from Operations

Answer 1

In order to ascertain the Trade Receivables Turnover Ratio, the figure of Credit Revenue from Operations will have to be ascertained.

It is as follows :
If Credit Revenue from Operations (Credit Sales) are Rs. 100,

Cash Revenue from Operations will be Rs. 25

Therefore, Total Revenue from Operations will be Rs. 100 + Rs. 25 = Rs. 125

Again, if Total Revenue from Operations are Rs. 125,

Credit Revenue from Operations = Rs. 100

If Total Revenue from Operations are Rs. 4,00,000.
Credit Revenue from Operations
= $\frac{100}{125}\times Rs.4,00,000$
= Rs. 3,20,000

Opening Trade Receivables
= Closing Trade Receivables - Excess of Closing Trade Receivables over Opening Trade Receivables
= Rs. 1,00,000 - Rs. 40,000
= Rs. 60,000

Average Trade Receivables = $\frac{\text{Opening Trade Receivables + Closing Trade Receivables}}{2}$

$=\frac{Rs.60,000+Rs.1,00,000}{2}=Rs.80,000$

Trade Receivable Turnover Ratio
$=\frac{CreditRevenuefromOperations}{AverageTradeReceivables}$

= $\frac{Rs.3,20,000}{Rs.80,000}=4times$

Average Collection Period
= $\frac{Daysinayear}{TradeReceivablesTurnoverRatio}$

$=\frac{365}{4}=91.25$ days or 92 days

It is to be noted that any fraction of a day such as 0.25 would, in practice, mean that the payment will be received next day. Hence. in the above case 91.25 days would imply 92 days.