Page 686 - Accounting Principles (A Business Perspective)

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year-end amount is available. Then the analyst must use the year-end amount. 51
In theory, the numerator of the accounts receivable turnover ratio consists of only net credit sales because those
are the only sales that generate accounts receivable. However, if cash sales are relatively small or their proportion to

total sales remains fairly constant, analysts can obtain reliable results by using total net sales. In most cases, the
analyst may have to use total net sales because the separate amounts of cash sales and credit sales are not reported
on the income statement.
Synotech's accounts receivable turnover ratios for 2010 and 2009 follow. Net accounts receivable on 2009
January 1, totaled USD 1,259.5 million.
December 31
(USD millions) 2010 2009 Amount of increase
Net sales (a) $10,498.8 $10,029.8 $469.0
Net accounts receivable:
January 1 $ 1,340.3 $ 1,259.5 $ 80.8
December 31 1,277.3 1,340.3 (63.0)
Total (b) $ 2,617.6 $ 2,599.8 $ 17.8
Average net receivables (c) (b/2 = c) $ 1,308.8 $1,299.9
Turnover of accounts receivable (a/c) 8.02 7.72
The accounts receivable turnover ratio provides an indication of how quickly the company collects receivables.
The accounts receivable turnover ratio for 2010 indicates that Synotech collected, or turned over, its accounts
receivable slightly more than eight times. The ratio is better understood and more easily compared with a
company's credit terms if we convert it into a number of days, as is illustrated in the next ratio.
Number of days' sales in accounts receivable The number of days' sales in accounts receivable

ratio is also called the average collection period for accounts receivable. Calculate it as follows:
Number of daysper year 365
Number of days'sales per accounts receivable=
Accountsreceivable turnover
The turnover ratios for Synotech show that the number of days' sales in accounts receivable decreased from
about 47 days (365/7.72) in 2009 to 46 days (365/8.02) in 2010. The change means that the average collection

period for the company's accounts receivable decreased from 47 to 46 days.

An accounting perspective:

Business insight

The number of days' sales in accounts receivable ratio measures the average liquidity of accounts
receivable and indicates their quality. Generally, the shorter the collection period, the higher the
quality of receivables. However, the average collection period varies by industry; for example,
collection periods are short in utility companies and much longer in some retailing companies. A
comparison of the average collection period with the credit terms extended customers by the
company provides further insight into the quality of the accounts receivable. For example,
receivables with terms of 2/10, n/30 and an average collection period of 75 days need to be
investigated further. It is important to determine why customers are paying their accounts much

later than expected.

Accounting Principles: A Business Perspective 687 A Global Text