How is the Accounts Receivable Turnover Ratio determined?

The Accounts Receivable Turnover Ratio is a key financial metric used to assess how efficiently a company is managing its receivables. It is determined by dividing net credit sales by average accounts receivable. This calculation provides insight into how many times a company collects its average accounts receivable balance during a specific period, typically a year.

Using net credit sales—sales made on credit that the company expects to collect—as the numerator focuses specifically on the revenue that impacts accounts receivable. Meanwhile, the average accounts receivable, calculated over a specific period, gives a clearer picture of overall collection efficiency.

A higher turnover ratio indicates that a company is effective in collecting its debts, implying good credit management and cash flow, while a lower ratio may suggest problems in collection or issues with extending credit to customers. This ratio helps businesses evaluate their liquidity and credit policies, enabling them to make informed decisions.

The other options provided do not accurately represent how to calculate the turnover ratio. Multiplying total sales by average accounts receivable, adding total receivables to cash on hand, or subtracting bad debts from total receivables do not give meaningful insights into how quickly a company collects money owed by customers.