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Question

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

Rs.    Total Revenue from Operations for the year (Total Sales)4,00,000Closing Trade Receivable1,00,000Excess of Closing Trade Receivables over Opening Trade Receivables40,000

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


Solution

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
= 100125×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 = Opening Trade Receivables + Closing Trade Receivables2

=Rs. 60,000 + Rs. 1,00,0002=Rs.80,000

Trade Receivable Turnover Ratio
=Credit Revenue from OperationsAverage Trade Receivables

= Rs. 3,20,000Rs. 80,000=4 times

Average Collection Period
= Days in a yearTrade Receivables Turnover Ratio

=3654=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.

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