Efficiency Ratios

Question 1

What does the creditors collection period ratio show? (Payables Days)

Answer 1

Creditors collection period ratio is designed to show how long, on average, it takes the company to pay debts owed to suppliers.

Question 2

What is the payables days calculation formula?

Answer 2

(Payables/Cost of sales) x365

Question 3

What does the debtors collection period ratio show? (Receivables days)

Answer 3

Receivables days ratio is designed to show how long, on average, it takes the company to collect debts owed by customers.

Question 4

Receivables days calculation?

Answer 4

(Debtors/Sales Turnover) x365

or

(Receivables/Total Revenue) x365

Question 5

How can the receivables days ratio be changed?

Answer 5

The receivables days ratio can be improved by:

• Reducing the amount of time for which credit is offered
• Offering incentives for clients to pay on time, e.g. cash discounts
• Stepping up the efficiency of the credit control department

Question 6

What is aged debtor analysis?

Answer 6

Sorting your receivables into the age of their debts to you - oldest first.

Question 7

What does inventory turnover ratio measure?

Answer 7

Inventory turnover ratio measures a company’s success in converting inventories into sales.

Question 8

Inventory turnover ratio formula

Answer 8

Inventory turnover ratio =

Cost of goods sold
/
Average inventories held

or

Inventories x365
/
Cost of sales