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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Which two ratios indicate a company’s efficiency in managing inventory and accounts receivable? How are they computed, and what do they mean?

To determine

State the two ratios that indicates the company’s’ efficiency in managing inventory and accounts receivable, explain the manner in which they are computed and explain its meaning.

Explanation

The two ratios that point out the efficiency of company in “managing inventory and accounts receivable” are as follows:

Inventory turnover ratio:

Inventory turnover ratio is used to determine the number of times inventory used or sold during the particular accounting period. Greater inventory turnover ratio indicates the following;

  • Company manages its production and supply chain management in an effective manner.
  • The amount of cash tied up in inventory is less.
  • The time taken by operating cycle is shorter to refill cash.

The formula to calculate the inventory turnover ratio is as follows:

Inventory turnover=Cost of goods soldAverage inventory

Accounts receivable turnover:

Accounts receivable turnover is a liquidity measure of accounts receivable in times, which is computed by dividing “the net credit sales by the average amount of net accounts receivables”.

It indicates the number of times the average amount of net accounts receivables collected during a particular period

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