The accounts receivable
turnover ratio is calculated as
total credit sales in the
year average accounts receivable
Average accounts receivable can be
determined 2 different ways:
Add together the a/r balances from the beginning
of the year and the end of the year, and divide by 2
Add together the a/r totals from the end of
each month, and divide by 12. This is a better way of
calculating the ratio.
If this ratio decreases from
one year to the next, it means the company is
taking longer to collect from its customers.
If the ratio increases, the company is collecting
from its customers more quickly.