Question

From the information given below, calculate Trade Receivables Turnover Ratio:
Credit Revenue from Operations, i.e., Credit Sales ₹8,00,000; Opening Trade Receivables ₹1,20,000; and Closing Trade Receivables ₹2,00,000.
State giving reason, which of the following would increase, decrease or not change Trade Receivables Turnover Ratio:
(i) Collection from Trade Receivables ₹40,000.
(ii) Credit Revenue from Operations, i.e., Credit Sales ₹80,000.
(iii) Sales Return ₹20,000.
(iv) Credit Purchase ₹1,60,000.

Answer 1

Average Trade Receivebles =${\displaystyle \frac{120000+200000}{2}=160000}$

Trade Receivable Turnover Ratio = ${\displaystyle \frac{\text{Net Credit Sales}}{\text{Average Trade Receivables}}=\frac{800000}{160000}}$ = 5 times

(i) Collection from Trade Receivables Rs 40,000- Increase

Reason: Collection from Trade Receivables will result in decrease in the amount of closing Trade Receivables which will reduce the amount of average Trade Receivables.

Closing Trade Receivables = 2,00,000 − 40,000 = Rs 1,60,000

Average Trade Receivebles = ${\displaystyle \frac{120000+160000}{2}=140000}$

Trade Receivable Turnover Ratio = ${\displaystyle \frac{\text{Net Credit Sales}}{\text{Average Trade Receivables}}=\frac{800000}{140000}}$ = 5.71 times (Increased from 5 to 5.71)

(ii) Credit Revenue from Operations, i.e. Sales Rs 80,000- Decrease

Reason: This transaction will result in increase in both credit sales as well as closing Trade Receivables. Increase in closing Trade Receivables, in turn, will lead to an increase in the average Trade Receivables.

Credit Sales = 8,00,000 + 80,000 = Rs 8,80,000

Closing Trade Receivables = 2,00,000 + 80,000 = Rs 2,80,000

Average Trade Receivebles = ${\displaystyle \frac{120000+280000}{2}}$ = Rs 200000

Trade Receivable Turnover Ratio = ${\displaystyle \frac{\text{Credit Sales}}{\text{Average Trade Receivables}}=\frac{880000}{200000}}$ = 4.4 times

(iii) Sales Return Rs 20,000- Increase

Reason: This transaction will result in decrease in both sales and average Trade Receivables.

Credit Sales = 8,00,000 − 20,000= Rs 7,80,000

Closing Trade Receivables = 2,00,000 − 20,000 = Rs 1,80,000

Average Trade Receivebles = ${\displaystyle \frac{120000+180000}{2}}$ = Rs 150000

Trade Receivable Turnover Ratio = ${\displaystyle \frac{780000}{150000}}$ = 5.2 Times

(iv) Credit Purchase Rs 1,60,000- No Change

Reason: Credit Purchase does not affect the Debtors Turnover Ratio.