Ratio Analysis - Creditors Turnover Ratio

Creditor’s Turnover Ratio is also known as Payables Turnover Ratio, Creditor’s Velocity and Trade Payables Ratio. It is an activity ratio that finds out the relationship between net credit purchases and average trade payables of a business.
It finds out how efficiently the assets are employed by a firm and indicates the average speed with which the payments are made to the trade creditors.

It is calculated by the following formula:

1. MANAGEMENT ACCOUNTING Ratio Analysis By: Smt.UMA MINAJIGI REUR HEAD, DEPT. OF COMMERCE & Management Smt. V G Degree College for Women, Kalaburagi

2. MANAGEMENT ACCOUNTING Ratio Analysis Turnover ratios – 3 Creditors Turnover Ratio

3. Classification of Accounting Ratio Types of ratios are given below: Liquidity Ratios Leverage Ratio Turnover Ratio Profitability Ratio

4. Turnover Ratios or Activity Ratios or Performance Ratios Turnover ratios are used to determine how efficiently the financial assets and liabilities of an organization have been used for the purpose of generating revenues. These ratios measure the operating efficiency of an enterprise. The types of Turnover ratios are: – Inventory Turnover Ratio or Stock Turnover Ratio. Debtors Turnover Ratio. Creditors Turnover Ratio. Cash Turnover Ratio. Working Capital Turnover Ratio. Fixed Assets Turnover Ratio. Capital Turnover Ratio or Sales to Net Worth Ratio.

5. Creditors Turnover Ratio Creditor’s Turnover Ratio is also known as  Payables Turnover Ratio,   Creditor’s Velocity  and  Trade Payables Ratio.  It is an activity ratio that finds out the relationship between net credit purchases and average trade payables of a business. It finds out how efficiently the assets are employed by a firm and indicates the average speed with which the payments are made to the trade creditors. It is calculated by the following formula: Creditors  

6. Creditors Turnover Ratio Net Credit Purchases = Total Purchases – Cash Purchases – Purchases Returns Calculation of Average Debtors :   Interpretation: Standard credit period is 30 days If the credit period is more than 30 days it indicates that sufficient credit period is received. If the credit period is less than 30 days it indicates that sufficient credit period is not received.

7. Creditors Turnover Ratio Calculation of Average (if B/P is given):    

8. Average payment Period The  Average Payment Period (APP),  also called as  Debt Payment Period , is a solvency ratio that measures the  average  number of days it takes for a business to  pay  its vendors for purchases made on credit.  Average payment period  is the  average  amount of time it takes a company to  pay  off credit accounts payable. It is calculated by dividing the number of months or days or weeks by the debtors turnover ratio. A  

9. Average payment Period A   A   A  

10. Average payment Period A   A * No. of days in a year  

11. Illustration 1: From the following information calculate Creditors turnover ratio (CTR) and Average payment period (APP). Total Purchases Rs.9,60,000, Cash sales 25% of Credit purchases, Creditors at beginning Rs. 80,000, Creditors at the end Rs. 72,000. Bills payable at beginning Rs. 28,000 and B/P at the end Rs.32,000. Calculation of Credit Purchases: Net Credit Purchases = Total Purchases – Cash Purchases – Purchase Returns = 9,60,000 – 25% of Credit Purchases - Nil If Credit Purchases -- 100 Add: Cash Purchase -- 25 Total Purchases -- 125 Solution 1:

12. Total Purchases Rs.9,60,000, Cash sales 25% of Credit purchases, Creditors at beginning Rs. 80,000, Creditors at the end Rs. 72,000. Bills payable at beginning Rs. 28,000 and B/P at the end Rs.32,000. 1. Calculation of Credit Purchases: Net Credit Purchases = Total Purchases – Cash Purchases – Purchase Returns = 9,60,000 – 25% of Credit Purchases - Nil If Credit Purchases -- 100 Add: Cash Purchase -- 25 Total Purchases -- 125 If Total Purchases is 125 , Credit Purchase is 100 For Total Purchase 9,60,000 …… ? Credit Purchases = 7,68,000 Solution 1:  

13. Total Purchases Rs.9,60,000, Cash sales 25% of Credit purchases, Creditors at beginning Rs. 80,000, Creditors at the end Rs. 72,000. Bills payable at beginning Rs. 28,000 and B/P at the end Rs.32,000. Creditors   Calculation of Average (if B/P is given):    

14. Total Purchases Rs.9,60,000, Cash sales 25% of Credit purchases, Creditors at beginning Rs. 80,000, Creditors at the end Rs. 72,000. Bills payable at beginning Rs. 28,000 and B/P at the end Rs.32,000. 2. Calculation of Average (if B/P is given):          

15. Total Purchases Rs.9,60,000, Cash sales 25% of Credit purchases, Creditors at beginning Rs. 80,000, Creditors at the end Rs. 72,000. Bills payable at beginning Rs. 28,000 and B/P at the end Rs.32,000. Creditors   Creditors   Creditors   3. Calculation of Creditors Turnover Ratio :

16. A   A   A   4. Calculation of Average Payment Period: A   A   A  

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