20.3 Debtors Turnover Ratio

VCE Accounting Unit 4

1. 20.3 debtors turnover ratio

2. The Stock Turnover Ratio is useful, but it fails to recognise that selling stock doesn’t mean the firm gets the cash at the same time … Supplier Business Customer 1. Buy stock from suppliers (creditors) 2. Sell stock to customers Some customers will pay in cash Some customers will pay with credit 20.3 debtors turnover ratio

3. When customers pay in cash … When customers pay with credit … Supplier Business Customer Debtors Supplier Business Customer 7 days later… 17 days later… 39 days later… 52 days later… 20.3 debtors turnover ratio

4. A firm needs to be able to effectively measure the time it takes to collect amounts owing from debtors Supplier Business Customer Debtors How many days does it take to collect amounts owing from debtors? 20.3 debtors turnover ratio

5. We can measure how long it takes for a firm to collect amounts owing from debtors with the Debtors Turnover Ratio. This ratio tells us: The number of times per period debtors are turned over into cash The average number of days it takes to collect amounts owing from debtors Supplier Business Customer Debtors How many days does it take to collect amounts owing from debtors? 20.3 debtors turnover ratio

6. Debtors Turnover Ratio can be expressed as: The number of times per year debtors are turned over into cash The average number of days it takes to collect amounts owing from debtors Debtors Turnover Ratio = Average Debtors Credit Sales Debtors Turnover in Days = Credit Sales Average Debtors x 365 OR… Debtors Turnover in Days = 365 Debtors Turnover Ratio 20.3 debtors turnover ratio

7. Example : a business had the following end-of-year data from 2014 to 2015: What is the Debtors Turnover Ratio for 2015 ? 2014 2015 Credit Sales 90000 Balance of Debtors Control 8000 10000 Debtors Turnover Ratio = Average Debtors Credit Sales Debtors Turnover in Days = Credit Sales Average Debtors x 365 = 9 000 9 0000 = 10.0 = 9 0000 9000 x 365 = 37 days 20.3 debtors turnover ratio

8. task In-class Homework SQ9 X